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HomeMy WebLinkAbout24 - Appendix ADRAFT 1/4/2011 APPENDIX A INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTHCARE CENTER, LLC AND OTHER AFFILIATES The information contained in this Appendix A has been obtained from Hoag Memorial Hospital Presbyterian. A -1 TABLE OF CONTENTS GENERAL................................................................................................................................. ............................... A- History......................................................................................................................................................... A- Mission........................................................................................................................................................ A- StrategicDirection ....................................................................................................... ............................... A- Integrated Physician Group Relationship ..................................................................... ............................... A- ORGANIZATIONAL STRUCTURE ........................................................................................ ............................... A- OrganizationChart ....................................................................................................... ............................... A- ObligatedGroup ........................................................................................................... ............................... A- Other Affiliated Entities Not Members of the Obligated Group .................................. ............................... A- Wholly -Owned Subsidiaries Which Are Immaterial Affiliates ....................................................A- HoagHospital Foundation ............................................................................. ............................... A- HoagOrthopedic Institute .............................................................................. ............................... A- OtherAffiliates .............................................................................................. ............................... A- GOVERNANCE AND MANAGEMENT ................................................................................. ............................... A- CorporateStructure ...................................................................................................... ............................... A- Boardof Directors ........................................................................................................ ............................... A- SeniorManagement ..................................................................................................... ............................... A- MEDICALSTAFF ..................................................................................................................... ............................... A- HOAG HEALTH FACILITIES & SERVICES .......................................................................... ............................... A- BedDistribution ........................................................................................................... ............................... A- Capacity....................................................................................................................... ............................... A- Descriptionof Services ................................................................................................ ............................... A- NewportBeach Campus ............................................................................................... ............................... A- HoagCancer Center ....................................................................................... ............................... A- Hoag Heart and Vascular Institute ................................................................. ............................... A- Hoag Women's Health Services .................................................................... ............................... A- HoagNeurosciences Center ........................................................................... ............................... A- IrvineCampus .............................................................................................................. ............................... A- HoagHospital Irvine ....................................................................................... ............................... A- HoagOrthopedic Institute ............................................................................... ............................... A- Hoag Health Centers and Medical Office Buildings .................................................... ............................... A- Newport Healthcare Center ............................................................................ ............................... A- OutpatientSurgery Facilities ........................................................................................ ............................... A- SERVICE AREA AND COMPETITION .................................................................................. ............................... A- ServiceArea ................................................................................................................. ............................... A- Market Share and Competition .................................................................................... ............................... A- Demographics.............................................................................................................. ............................... A- SELECTED FINANCIAL AND OPERATING INFORMATION ............................................ ............................... A- Summary Historical Financial Data ............................................................................. ............................... A- Sources of Patient Services Revenue ........................................................................... ............................... A- HistoricalUtilizat ion .................................................................................................... ............................... A- Capitalization............................................................................................................... ............................... A- A -2 EstimatedDebt Service Coverage ................................................................................ ............................... A- MANAGEMENT' S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION .... ............................... A- HistoricalPerf ormance ................................................................................................. ............................... A- Liquidity, Investment Policy and Investment Portfolios .............................................. ............................... A- Short-Term Portfolio ...................................................................................... ............................... A- Long -Term Portfolio ...................................................................................... ............................... A- Certain Indebtedness and Liabilities ............................................................................ ............................... A- CapitalExpenditures .................................................................................................... ............................... A- Fundraising.................................................................................................................................................. A- California Hospital Provider Fee .................................................................................. ............................... A- OTHER INFORMATION .......................................................................................................... ............................... A- Licensure, Certification & Accreditation .................................................................... ............................... A- Awardsand Recognition ............................................................................................. ............................... A- Community Outreach, Education and Volunteer Services ........................................... ............................... A- Employees................................................................................................................................................... A- EmployeeRetirement Plans ......................................................................................... ............................... A- Legal& Regulatory Matters ......................................................................................... ............................... A- POTENTIAL AFFILIATIONS AND TRANSACTIONS ......................................................... ............................... A- A -3 GENERAL History Hoag Memorial Hospital Presbyterian (the "Corporation") was incorporated as a nonprofit corporation under the laws of the State of California on May 22, 1944. The Corporation is currently operating as a nonprofit public benefit corporation under the laws of the State of California. The Corporation is an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the "Code "), and is not a private foundation described in Section 509 of the Code. Half of the initial funding for the Corporation was provided by the George Hoag Family Foundation and half by funds raised from the community through the Presbyterian Church. Mission The Corporation's mission as a nonprofit, faith -based hospital is to provide the highest quality healthcare services to the communities it serves. Inspired by the vision of its founders and community partners and the dedication of its employees and physicians, the Corporation is committed to being a trusted and nationally recognized health care leader. The Corporation promotes five core values: excellence, respect, integrity, patient centeredness and community benefit. Strategic Direction Building upon the Corporation's leading market position for hospital care (See "SERVICE AREA AND COMPETITION — Market Share and Competition "), in early 2010, the Corporation adopted certain strategic shifts designed to position the organization for a transition to an integrated healthcare delivery network. These strategic shifts include key capital and operating investments in a continuum of care strategy in partnership with physicians. These continuum of care investments will align providers to function in a more integrated manner to improve outcomes, reduce cost and improve patient experience. To realize its vision of becoming an integrated healthcare delivery network, the Corporation has updated its strategic plan which includes key initiatives in the areas of quality and service, people, financial stewardship, community benefit, physician partnerships and strategic growth. The strategic plan is reviewed and updated every three years. With respect to quality and service, the Corporation plans to improve the patient experience across the continuum of care and to provide safe, effective, consistent care to patients. In addition, the Corporation will seek to deliver innovation and excellence in clinical programs. The Corporation's people strategy is to engage and empower its workforce in a culture that fosters learning through trust, respect, accountability, and innovation. The Corporation's financial stewardship and community benefit initiatives are designed to maintain the Corporation's financial base while (1) achieving the operating efficiencies required to enable continued investment in strategic growth, and (2) maintaining historic levels of community benefit. In the area of physician partnership, the Corporation is committed to creating trusting and mutually beneficial relationships with its affiliated physicians by providing access to clinical, administrative and outcome information through the use of electronic health records and a health information exchange, driving the use of comprehensive data to improve patient value, effectively implementing physician/Corporation alignment options, achieving meaningful physician leadership and creating a flexible business model to successfully compete in the health care reform environment. Tthe Corporation's strategic growth plan is to extend its services more broadly into the communities it serves, including key capital and operating investments in continuum of care strategies and preparing for participation in population health management. The Corporation's strategic vision includes A -4 adapting the overall business model to build or acquire comprehensive capabilities to manage population health. Many of these capabilities are contemplated through risk - bearing entities and/or Accountable Care Organizations ( "ACOs "). An ACO is a network of clinically and financially integrated providers willing and capable of accepting accountability for the total cost and quality of care for a defined population. The goal of an ACO is to work to measurably improve the total cost, quality and satisfaction of a defined population's care. The Corporation expects to leverage its experience, particularly in risk - bearing payor relationships and its extensive outpatient services, to build a successful ACO model. See also "Integrated Physician Group Relationship" below. The Corporation is also a participant in the Premier Accountable Care Implementation Collaborative, one of 24 members nationwide, which seeks to assist members in building ACOs and position them as leaders in transforming healthcare. Integrated Physician Group Relationship As of the Fiscal Year ended September 30, 2010, approximately 9.6% of Operating Revenue generated by the Corporation and its Wholly -Owned Subsidiaries was derived through capitated payment arrangements with health plans through the Corporation's contractual relationship with Greater Newport Physicians Medical Group, Inc. ( "Greater Newport"), an independent physician association ( "IPA "). That contractual relationship covers a Medicare Advantage population having approximately 11,600 enrollees as of September 1, 2010. The Corporation is the primary facility under that contractual relationship for the provision of acute care services and most outpatient services for those enrollees. See also "SELECTED UTILIZATION AND FINANCIAL INFORMATION — Management's Discussion and Analysis of Financial Information." ORGANIZATIONAL STRUCTURE Organization Chart The following chart depicts the organizational structure of the Corporation, its Wholly -Owned Subsidiaries and Other Affiliates. A -5 HOAG MEMORIAL HOSPITAL PRESBYTERIAN AND AFFILIATES Hoag Memorial I I Hospital Hoag Hospital Presbyterian (the Foundation (the "Corporation ")` "Foundation') port Healthcare Coastal Physicians Hoag Management Other Center, LLC Purchasing Group, Services, Inc. Affiliated ( "NHC')" ( "HMSI ") Entities Inc. ('CPPG ") Hoag Orthopedic Newport Imaging Institute Center, LLC ( "HOI ") "" ('NIC') *The Corporation (which owns and operates Hoag Hospital Newport Beach and Hoag Hospital Irvine) and NEC are the only Members of the Obligated Group. ** Certain immaterial affiliates which are currently being dissolved are not shown, but are reflected in the Corporation's audited financial statements. See Appendix B. * * *HOI owns 90% of Orthopedic Specialists of Newport Beach, LLC ( "OSNB "), 20% of Orthopedic Surgery Center of Orange County, LLC ( "OSCOC ") (the other 80% of OSCOC is owned by OSNB) and 83.052% of Main Street Specialty Surgery Center, LLC ( "MSSSC "). A -6 Obligated Group Pursuant to the Master Indenture, the Corporation and Newport Healthcare Center, LLC ( "NHC ") are the sole Members of the Obligated Group. However, the Corporation is the sole shareholder of, or is otherwise affiliated with, several entities consisting of other wholly -owned subsidiaries and affiliates. References herein to the "Obligated Group" or "Members" mean the Corporation and NHC as of this date, although in the future other entities may become Members of the Obligated Group or Members may withdraw from the Obligated Group in accordance with the terms of the Master Indenture. The Corporation established a nonprofit acute care hospital in the City of Newport Beach, California in 1952. See also "GENERAL — History." In 2010, the Corporation established a second campus, including an acute care general hospital (operated by the Corporation) and an orthopedic specialty hospital (operated by HOI) in the City of Irvine, California. See also "HOAG HEALTH FACILITIES & SERVICES — Irvine Campus." In 2005, the Corporation formed NHC as a Delaware limited liability company, the sole member of which is the Corporation, to own and operate Hoag Health Center — Newport Beach and other medical office building properties in Newport Beach as described below. The Corporation originally capitalized NHC with $85 million and has subsequently made additional contributions to NEC in the amount of $64 million as of December 31, 2010. The Corporation expects to make all payments with respect to the City's Refunding Revenue Bonds (Hoag Memorial Hospital Presbyterian), Series 2011 (the "2011 Bonds ") from its own funds and from income generated by NHC. Other Affiliated Entities Not Members of the Obligated Group Wholly -Owned Subsidiaries Which Are Immaterial Affiliates The Corporation is the sole shareholder and appoints one -half of the board members of Coastal Physician Purchasing Group Inc. ( "CPPG "), a for -profit corporation which provides shared purchasing services for physicians. The Corporation is also the sole shareholder and appoints all of the board members of Hoag Management Services Inc. ( "HMSI "), formerly known as Hoag Practice Management Inc., a for - profit corporation which provides services to other affiliates of the Corporation. CPPG and HMSI are collectively referred to herein as "Immaterial Affiliates" and they currently constitute Immaterial Affiliates as defined in the Master Indenture. The Corporation has two other Immaterial Affiliates which are in the process of dissolution, although they are referenced in the audited financial statements of the Corporation. The Immaterial Affiliates are not Members of the Obligated Group and are not obligated with respect to the 2011 Bonds. References herein to the "Wholly -Owned Subsidiaries" shall mean CPPG, HMSI and NHC; however, CPPG and HMSI are not Members of the Obligated Group and are not obligated with respect to the 2011 Bonds. The Corporation is also affiliated with the Hoag Hospital Foundation, Hoag Orthopedic Institute, LLC (which holds a majority ownership interest in two outpatient surgery centers, Main Street Specialty Surgery Center, LLC and Orthopedic Surgery Center of Orange County, LLC, and a holding company Orthopedic Specialists of Newport Beach, LLC), and Newport Imaging Center, LLC, and these entities are referred to herein as "Other Affiliates." The Other Affiliates are not Members of the Obligated Group and are not obligated with respect to the 2011 Bonds. See "Hoag Orthopedic Institute" and "Other Affiliates" below. Hoag Hospital Foundation The Hospital receives support through the Hoag Hospital Foundation (the "Foundation "), which is a separate nonprofit 501(c)(3) corporation. The Board of Directors of the Foundation is appointed by the Board of Directors of the Corporation. Under the direction of the Foundation, there are two support groups with a total membership of over 4,000 individuals. The audited financial statements of the Foundation are consolidated with those of the Corporation. The assets and liabilities of the Foundation are primarily A -7 included in the temporarily and permanently restricted net assets in the consolidated financial statements. As of the Fiscal Year ended September 30, 2010, the Foundation's total assets and total net assets were $179.1 million and $173.4 million, respectively. In Fiscal Years ended September 30, 2010 and 2009, the Foundation distributed funds to the Corporation for property and capital additions in the amount of approximately $2.9 million and $15.3 million, respectively. The Foundation is not a Member of the Obligated Group and is not obligated with respect to the 2011 Bonds. Hoag Orthopedic Institute In late 2008, the Corporation formed Hoag Orthopedic Institute, LLC, a California limited liability company ( "HOI "), a joint venture created for the purpose of pursuing strategic alliances related to inpatient and outpatient orthopedic surgery and related services. The Corporation maintains a 51% controlling interest in HOI, while the remaining 49% interest is owned by certain physicians . and physician groups. HOI operates a 70 bed orthopedic specialty hospital at the Corporation's Irvine campus (the "Specialty Hospital ") under a separate hospital license, and owns a controlling interest in two affiliated ambulatory surgery centers. The ambulatory surgery centers are Main Street Specialty Surgery Center, LLC ( "MSSSC ") and Orthopedic Surgery Center of Orange County, LLC ( "OSCOC "). These entities are controlled by HOI, and are partly owned by affiliated physicians and physician groups forming part of the ownership of HOI. HOI leases the space for the Specialty Hospital from the Corporation. The Corporation provides substantially all administrative services to HOI, and HOI leases its workforce from the Corporation. The Corporation's interest in HOI is expected to be a material component of the Corporation's financial performance, and is expected to be responsible for significant operating and non - operating revenue and income of the Corporation. See " The business of HOI is described more fully under "HOAG HEALTH FACILITIES AND SERVICES —Irvine campus - Hoag Orthopedic Institute." The financial statements of HOI are consolidated with those of the Corporation. HOI is not a Member of the Obligated Group and is not obligated with respect to the 2011 Bonds. Other Affiliates The Corporation is a managing member of Newport Imaging Center, LLC ( "NIC "), which operates two imaging centers located in Newport Beach. In 2008, NIC converted from a limited partnership (of which the Corporation was the sole general partner) to a limited liability company, and the Corporation increased its majority membership interest to 99.9 %. The Corporation has the option to purchase the remaining 0.1% interest at any time. The financial statements of NIC are consolidated with those of the Corporation. NIC is not a Member of the Obligated Group and is not obligated with respect to the 2011 Bonds. From time to time the Corporation may modify its level of participation in its existing ventures or consider additional investments in other joint ventures. All such activities are expected to further the Corporation's strategic interests in accordance with its strategic plan. See "POTENTIAL. AFFILIATIONS AND TRANSACTIONS" below. GOVERNANCE AND MANAGEMENT Corporate Structure The Corporation has fifty members, twenty-five appointed by the George Hoag Family Foundation and twenty-five by the Association of Presbyterian Ministers of Orange County. The Members elect the Board of Directors of the Corporation (the "Board "). Nominations to the Board are made as follows: a nominating committee of the Board — between nine and fifteen; the Medical Staff — three, and the President & CEO as a director; for a total of thirteen to nineteen nominations. on In 2007, the Governance Committee of the Board began exploring the concept of an "attribute - based board" and adopted a comprehensive process to identify the current and future needs of the Board relative to expertise, talents, skill sets and personal attributes. With the agreement of the full Board of Directors in early 2008, a process for recruiting, interviewing and nominating candidates for the Board and its committees was implemented. Each year the Governance Committee begins the process of determining the attributes anticipated to be needed on the Board in the near future and identifying and approaching individuals with those attributes to fill any vacancies that may exist. Board of Directors The current members of the Board are listed below: Name Stephen Jones, Chair Robert W. Evans, Vice Chair John L Benner, Secretary Richard F. Afable, M.D. Dick P. Allen Allyson Brooks, M.D. Weston G. Chandler, M.D. Jake Easton III Max W. Hampton Jeffrey H. Margolis Gary S. McKitterick Richard A. Norling Richard M. Ortwein James O. Rollans Years on Term Occupation Board Expires hl Commercial Construction Executive 8 2013 Retired Sales & Marketing Executive 12 2012 Retired Financial Management Consultant 6 2013 Hospital President & CEO 5 2013 Venture Capitalist; Philanthropist 1 2012 Physician, Gynecology 4 2012 Physician, Internal Medicine; Hospitalist 0.25 2013 Management Consultant 7 2012 Retired Investment Executive 13 2013 Healthcare Information Technology Executive 2 2011 Attorney, Real Estate Law 3 2013 Healthcare Quality Management Executive 2 2011 Independent Real Estate Developer 10 2011 Retired Finance Executive 0.25 2013 Ev All terms expire at the end of the Fiscal Year - September 30. Senior Management The management of the Corporation has been delegated by the Board of Directors to the administrative staff. Brief resumes of members of senior management are included below: President and Chief Executive Officer. Richard Afable, M.D., M.P.H. has been President and Chief Executive Officer of the Corporation since August 2005. Prior to his selection as President and Chief Executive Officer of the Corporation, Dr. Afable served as Executive Vice President and Chief Medical Officer at Catholic Health East, the largest nonprofit health care system on the East Coast, and was part of its senior management team, which guided the strategic operation and management of the health system. As Executive Vice President, he was responsible for all aspects of clinical performance and quality management and had corporate responsibility for information technology, managed care, patient safety, communication, and physician relationships. Before joining Catholic Health East, Dr. Afable was the founder and President/CEO of Preferred Physician Partners (PPP), a physician practice management company that supported physician groups and provider networks. Prior to transitioning to hospital administration, Dr. Afable was in private practice in Chicago, specializing in internal medicine and geriatrics. Dr. Afable received his Bachelor of Science from Loyola University in Chicago and a Medical Doctorate from the Loyola Stritch School of Medicine. He obtained his Masters in Public Health degree from the University of Illinois School of Public Health and a certificate in business administration from Villanova University. Chief Operating Officer. Robert T. Braithwaite has served in various administrative capacities at Hoag Hospital during his career. Effective January 1, 2011, Mr. Braithwaite serves as the Corporation's Chief Operating Officer. In this role, Mr. Braithwaite has senior operating responsibility for the A -9 Corporation's Newport Beach and Irvine campuses. Mr. Braithwaite previously served as Chief Administrative Officer for Hoag Hospital Irvine (2008- 2010), Senior Vice President, Hospital Services (2005- 2007), Vice President, Operations and Service Lines (1999 -2004) and Vice President of Support and Ancillary Services (1992 - 1996). He has also served in senior executive positions with several other large nonprofit hospitals such as Rady Children's Hospital San Diego (2007- 2008), and St. Joseph Hospital in Orange California (1996- 1999). Mr. Braithwaite received his Masters in Health Services Administration from Arizona State University and a Bachelor of Science in Health Management and Promotion from Brigham Young University, graduating Magna Cum Laude. Senior Vice President — Corporate Services and Chief Financial Officer. Jennifer C. Mitzner has been with the Corporation since 1994. As Chief Financial Officer, she is responsible for all aspects of corporate finance including treasury, accounting, finance, materials management, managed care contracting, patient financial services, patient access functions, and internal audit. Ms. Mitzner is also responsible for all corporate services including human resources, marketing, legal and compliance. Ms. Mitzner received her Master of Public Administration in Health Care Administration from the University of San Francisco and her Bachelor of Business Administration, Accounting from Texas Christian University and is a Certified Public Accountant. Ms. Mitzner was previously with KPMG Peat Marwick in the advisory services group for both the healthcare and insurance industry (1990- 1994). Other members of senior management include: Senior Vice President, Development, Hoag Hospital — President, Hoag Hospital Foundation. Flynn A. Andrizzi, Ph.D. joined the Corporation in 2010. Dr. Andrizzi is responsible for the philanthropic operations of the Hoag Hospital Foundation. Prior to joining Hoag, Dr. Andrizzi served as Senior Vice President and Chief Development Officer for the University of Iowa Foundation. In that role, Dr. Andrizzi was responsible for the development operations of a foundation that annually raised $175 million to $200 million in philanthropy. In addition, Dr. Andrizzi helped lead a $1 billion comprehensive campaign to a successful conclusion. Dr. Andrizzi was previously Vice President for Development at Thomas Jefferson University in Philadelphia. He has also held various leadership positions in the development office at the University of Utah. Dr. Andrizzi received his Doctorate of Philosophy in Educational Leadership & Policy, a Masters of Public Administration and Bachelor of Science in Communication and Political Science, all from the University of Utah. Senior Vice President — Clinical Excellence and Chief Quality Officer. Jack Cox, M.D., M.M.M., joined the Corporation in 2006 and directs quality and performance improvement initiatives, risk management and clinical research, and oversees the Corporation's Centers of Excellence and the Diabetes Center. Prior to joining the Corporation, he served as Chief Medical Officer and Senior Vice President with Premier, Inc, a national healthcare alliance, where he was responsible for the development of a model for quality improvement initiatives in conjunction with the Institute of Healthcare Improvement and participated in the design of a medical technology evaluation process that incorporated quality and safety. Previously, Dr. Cox was a medical director for Intermountain Health Care, Inc. where he led operational and quality improvement for eight outpatient physician group practices. He has served on the clinical faculty for five medical schools and was previously involved in academics and research for 13 years, including serving as director for two residencies. Dr. Cox is a board certified family physician, a fellow of the American Board of Family Practice, and a fellow of the American College of Physician Executives. Dr. Cox received his Bachelor of Arts in Biology (Biochemistry) from University of Tennessee, a Medical Doctorate from University of Mississippi Medical School, and a Masters in Medical Management from Tulane University. Senior Vice President — Clinical Operations and Chief Nursing Officer. Richard Martin, M.S.N, R.N., has been with the Corporation for 16 years and oversees all nursing and clinical operations departments, including the emergency care unit, cheinical dependency, perioperative services, pharmacy, laboratory services and imaging services. Mr. Martin is active on numerous nursing committees and boards, several of which were formed in response to the state and national nursing shortage. In the late 1990's he was appointed to the Scott Commission, a panel of nursing industry leaders, to address the nursing shortage in California. Mr. Martin also serves on the Orange County Nurse Executive Council, the A -10 Advisory Board for Nurseweek, and the Advisory Board for the School of Nursing at California State University, Long Beach, where he is also an Adjunct Faculty member. He also participates in several professional organizations including the American College of Healthcare Executives, Association of California Nurse Leaders, American Organization of Nurse Executives, National League of Nurses, American Society for Quality and Leadership Tomorrow. Prior to joining the Corporation, Mr. Martin was Assistant Vice President of Patient Care Services at HCA Lewis -Gale Hospital in Salem, Virginia. Mr. Martin received his Masters in Nursing from the University of Virginia and a Bachelor of Science in Nursing from West Virginia University. Senior Vice President — Chief Information Officer. Tim Moore joined the Corporation in August 2009 and is responsible for overall information technology strategy and execution. Prior to joining the Corporation, his most recent experience was at Perot Systems, a global provider of IT and business solutions to healthcare, government, manufacturing, banking, insurance, and other industry clients. Mr. Moore served as an Executive Director for Provider Healthcare at Perot, where he worked with large health care systems. Prior to Perot, Mr. Moore was a Corporate Vice President and CIO for Carondelet Health System, a national health care system of 19 hospitals. Mr. Moore received his Bachelor of Science from Louisiana State University Medical Center, School of Nursing. Senior Vice President — Strategy and Business Development. Cynthia Perazzo joined the Corporation in 2009 and leads strategic planning, business development and physician outreach activities. Prior to joining the Corporation, Ms. Perazzo served as Vice President, Corporate Development for Premier, Inc., a national healthcare alliance, and was responsible for corporate planning and strategic initiatives. Prior to joining Premier, Ms. Perazzo co- founded and led business development for nTrusted, Inc., a consumer focused, health software company. Ms. Perazzo also led business development for Vectis Corporation, a venture offering point -of -care clinical information systems, and previously worked for Boston Consulting Group and Merrill Lynch & Co. Investment Banking Group. Ms. Perazzo holds a Masters in Business Administration degree from Harvard Business School and a Bachelor of Business Administration in Finance from the University of Texas at Austin. Senior Vice President —Real Estate and Facilities. Sanford Smith, AIA, joined the Corporation in 2008 and oversees all planning, development, operations and management of the Corporation's facilities including hospital, outpatient services and medical office buildings. Prior to joining the Corporation, Mr. Smith was the Corporate Manager of Real Estate and Facilities for Toyota Motor Sales, USA, Inc. Mr. Smith received his Bachelor of Arts from California State Polytechnic University, Pomona. MEDICAL STAFF The Board of Directors of the Corporation requires an organized medical staff to have a critical role in the process of providing oversight of quality care, treatment and services delivered by the physicians, dentists, oral surgeons, and podiatrists who are credentialed and privileged to utilize the Hospital's services and facilities and participate in the medical activities of the Hospital on a regular basis. As of September 30, 2010, the Corporation's Medical Staff was comprised of 1,320 physicians, dentists, oral surgeons and podiatrists. The average age of the medical staff is approximately 50 years. For the twelve months ended September 30, 2010, the top 20 attending physicians, whose average age was 40 years, accounted for approximately 31% of the Corporation's inpatient admissions, excluding newborns as separate admissions. The following chart includes all physicians on the Corporation's Medical Staff as of September 30, 2010: A -1] Special Number of Physicians Allergy & Immunology 8 Anesthesia 57 Cardiac Surgery 5 (including privileges for thoracic) Cardiology 73 Colon- Rectal Surgery 4 Critical Care 23 Dental /Oral Surgery 30 Dermatology 41 Emergency Medicine 25 Endocrinology 26 Family /General Medicine 134 Gastroenterology 37 General Internists 161 General Surgery 36 Infectious Diseases 14 Neonatology 16 Nephrology 18 Neurologists 20 Neurosurgeons 16 Obstetrics /Gynecology 90 Oncology 39 Ophthalmology 59 Orthopedic Surgery* 37 Otolaryngology 24 Pathology 11 Pediatric Surgery 1 Pediatrics 76 Perinatology 7 Physical Medicine /Rehab 11 Plastic Surgery 76 Podiatry 14 Psychiatry 13 Pulmonologists 27 Radiation Oncology 7 Radiology 33 Rheumatologists 10 Thoracic Surgery 11 Urology 17 Vascular Surgery 13 TOTAL 1,320 Source: Corporation *With the formation of 1101 and the licensure and opening of the Specialty Hospital, 1101 has acquired the Corporation's elective orthopedic surgery line of business formerly conducted at the Newport Beach campus. While substantially all of these physicians remain members of the Corporation's medical staff, substantially all of their patient admissions will be at HO1, and not Hoag following the opening of the Specialty Hospital. See also "HOAG HEALTH FACILITIES & SERVICES — Irvine Campus — Hoag Orthopedic Institute" below. A -12 HOAG HEALTH FACILITIES & SERVICES The Corporation operates two general acute care hospitals in California, one in the City of Newport Beach and the other in the City of Irvine. In 2010, the Corporation also established an orthopedic Specialty Hospital in the City of Irvine through HOI. See "ORGANIZATIONAL STRUCTURE — Other Affiliated Entities Not Members of the Obligated Group — Hoag Orthopedic Institute" and "Irvine Campus — Hoag Orthopedic Institute" below. In addition, the Corporation's health facilities include several health centers, medical office buildings and two free - standing outpatient surgery facilities, as described in more detail below. Bed Distribution The Corporation operates two acute care hospital facilities — one in Newport Beach, California and the other one in the City of Irvine, California. Both facilities operate under the same license. Hoag Hospital Newport Beach is licensed for 498 beds, 427 of which are currently staffed and operating. The Corporation took possession of the Hoag Hospital Irvine facility with that facility license placed in suspense. Upon completion of the first phase of the renovations at Hoag Hospital Irvine, the Corporation received approval from the California Department of Health Services to place 84 suspended beds at Hoag Hospital Irvine into service to allow operation of Hoag Hospital Irvine as planned on September 1, 2010. The remaining 70 suspended beds have been licensed by HOI for operation of the Specialty Hospital. These beds were removed from the Corporation's license and transferred to the HOI license effective November 10, 2010. HOI has a total of 70 medical /surgical beds. See also "Irvine Campus — Hoag Orthopedic Institute" below. The following table shows the existing distribution of licensed and staffed beds by category for the Newport Beach and Irvine hospital facilities: Capacity HOI's Specialty Hospital effectively relocates the Corporation's former Orthopedic Center of Excellence to HOI and the Irvine campus. This transfer of service allows for the consolidation and expansion of substantially all orthopedic services with HOI and the Specialty Hospital. This transfer of service also serves to free up inpatient beds (approximately 26 licensed beds) and surgical capacity (approximately 3 ORs) at the Corporation's main Newport Beach campus, providing for future growth at that location. See also "Irvine Campus — Hoag Orthopedic Institute" below. Description of Service Since opening its Newport Beach campus on September 15, 1952, the Corporation has grown from a single -site hospital to having three hospitals across two campuses and multiple satellite outpatient services locations; from 75 beds to 652 (70 of which are licensed to HOI); from 68 medical staff doctors to over 1,300 and from 60 employees to more than 5,000. In the Fiscal Year ended September 30, 2010, the A -13 Hoag Hospital Hoag Hospital Irvine The Corporation Hoag Orthopedic Newport Beach TOTAL Institute Licensed Staffed Licensed Staffed Licensed Staffed Licensed Staffed Medical/Surgical 329 266 72 72 401 338 70 70 Intensive Care 45 35 12 12 57 47 0 0 Coronary Care 12 10 0 0 12 10 0 0 Matemity /LDR 70 74 0 0 70 74 0 0 Intensive Care 21 21 0 0 21 21 0 0 Nursery Pediatrics 0 0 0 0 0 0 0 0 Chemical 21 21 0 0 21 21 0 0 Dependency Total 498 427 84 84 582 511 70 70 Capacity HOI's Specialty Hospital effectively relocates the Corporation's former Orthopedic Center of Excellence to HOI and the Irvine campus. This transfer of service allows for the consolidation and expansion of substantially all orthopedic services with HOI and the Specialty Hospital. This transfer of service also serves to free up inpatient beds (approximately 26 licensed beds) and surgical capacity (approximately 3 ORs) at the Corporation's main Newport Beach campus, providing for future growth at that location. See also "Irvine Campus — Hoag Orthopedic Institute" below. Description of Service Since opening its Newport Beach campus on September 15, 1952, the Corporation has grown from a single -site hospital to having three hospitals across two campuses and multiple satellite outpatient services locations; from 75 beds to 652 (70 of which are licensed to HOI); from 68 medical staff doctors to over 1,300 and from 60 employees to more than 5,000. In the Fiscal Year ended September 30, 2010, the A -13 Corporation treated over 28,000 inpatients and over 350,000 outpatients. With the opening of HOI it is expected that approximately 1,800 to 2,000 inpatient and approximately 950 outpatient cases per year will be transferred from the Corporation's Newport Beach campus to HOI's Specialty Hospital in Irvine. The Corporation offers a comprehensive mix of health care services including, but not limited to: • cardiology and cardiovascular surgery • chemical dependency • comprehensive cancer services • critical care • general acute medical and surgical services • neurological and neurosurgical services, including gamma knife • orthopedics and joint replacement • radiology (e.g, MRIs, CT and PET) • robotics • specialty programs such as sleep disorders and epilepsy • women's health services • diabetes education and treatment Emergency room care also plays a key role, as approximately 49% of all inpatient admissions in Newport Beach and Irvine in the Fiscal Year ended September 30, 2010, excluding newborns, were admitted to the hospital through the Emergency Department ( "ED "). Within the last year, the ED has seen in excess of 73,000 patients, approximately 200 per day. In addition to the increased space and equipment added during recent renovations to the ED in Newport Beach, the Corporation's emergency efforts are supported by life -flight helicopter services and a paramedic radio base station. ED admissions are expected to increase as a result of the opening of the Irvine campus in 2010. Newport Beach Campus The Corporation established a nonprofit acute care hospital licensed for 75 beds in the City of Newport Beach, California (the "City") in 1952. This hospital facility is on a 37 -acre parcel in Newport Beach in a campus -like setting of 36 buildings, including 3 parking structures and approximately 2,500 parking spaces. The Corporation owns the land and facilities on the campus in Newport Beach. The total gross building area for all buildings, including parking and temporary structures, as well as other spaces covers approximately 1.8 million square feet. The Newport Beach facility underwent major expansions in 1969, 1974, 1990, and 2005 and is currently licensed for 498 general acute care beds. The Corporation and NBC own other real estate near the Newport Beach campus which is or may be used for medical office space, administrative and other supporting functions. See also "Hoag Health Centers and Medical Office Buildings" below. In 2006, the Corporation completed the construction of a Cogeneration Plant, a base -load plant to generate power. The two -story, approximately 27,000 square -foot facility, is located on the lower portion of the Newport Beach campus and houses generators capable of supplying as much as 4.4 megawatts of power. The Cogeneration Plant captures its waste heat and converts it to chilled and hot water which is used for air conditioning and heating systems of the hospital to maximize energy output. The Cogeneration Plant became operational in March 2007. In the fall of 2008, the Corporation opened the Marilyn Herbert Hausman Advanced Technology Pavilion (the "ATP "), an approximately 7,800 square -foot outpatient imaging facility located on the lower campus in Newport Beach. The ATP offers some of the latest in advanced technology imaging services, including high definition PET /CT, the only available large -bore 3T MR] in Orange County, and the Leksell 9 Gamma Knife Perfexion TM. The Corporation supports four specialty centers on its Newport Beach campus, referred to as "Centers of Excellence" — Hoag Cancer Center, Hoag Heart and Vascular Institute, Hoag Women's Health Services and Hoag Neurosciences Center — through which the Corporation provides a wide range of specialized medical, surgical, diagnostic and therapeutic services. A -14 Hoar Cancer Institute In January of 1991, the Corporation opened the Patty and George Hoag. Cancer Center (approximately 63,000 square feet) located on the Newport Beach campus (the "Cancer Institute "). The Cancer Institute provides three linear accelerators, an infusion center for chemotherapy, a biotherapeutics laboratory and physician offices for medical oncologists. Designated by the American College of Surgeons as a comprehensive community cancer program in late 1990, Hoag Cancer Institute is the largest cancer program in Southern California outside of Los Angeles County, as measured by number of cases reported to the California State Tumor Registry Board. As Orange County's leading provider of radiation therapy and cancer care, the Cancer Institute treats more than 2,200 new patients annually. In 2008, the Commission on Cancer of the American College of Surgeons ( "CoC ") awarded Hoag Cancer Institute the CoC Outstanding Achievement Award and granted a new three -year accreditation with commendation as a Comprehensive Community Center Program. Established in 2004, the CoC Outstanding Achievement Award was designated to recognize cancer programs that excel in providing quality care to cancer patients. The CoC recognizes programs that strive for excellence, motivate improvement, foster communication and share best practices and bases its commendations on comprehensive periodic evaluations, including physician surveys. Hoag Cancer Institute provides: • biotherapy and immunotherapy • cancer data services • cell biology research laboratory • chemotherapy • clinical trials • complementary care program • comprehensive support and educational services for patients • Gamma Knife treatment of brain tumors • hereditary screening • high -dose rate brachytherapy (HDR) • intensity- modulated radiation therapy (IMRT) • patient and community education • patient and family support programs • pheresis • physical rehabilitation • radiation therapy • radioactive seed implantation surgery for prostate cancer • robotic surgery • sentinel node /lymphatic mapping • site specific programs for cancers of the breast, prostate, gastrointestinal, lung and brain • stereotactic radiotherapy • vaccine therapy Hoag Cancer Institute continues to achieve five -year relative survival rates that exceed national figures for most cancers, as reported in 2008 by the National Cancer Institute's Surveillance, Epidemiology and End Results (SEER) data for 1996 -2003. In June 2010, US News & World Report released its latest top 100 hospital rankings. A total of 912 hospitals were listed under Cancer on the basis of treating at least 270 inpatients from 2006 — 2008 needing a high level of expertise in this specialty, or if surveyed specialists recommended the hospital for such patients. Hoag Cancer Institute ranked 9t° among California hospitals and the highest in Orange County. Hoag Cancer Institute ranked 78th overall for cancer treatment to rank in the top two percent of all hospitals and top 10 percent among 912 cancer hospitals in the US; it rated 48th overall in reputation for cancer treatment. A -15 Hoar Heart and Vascular Institute Hoag Heart and Vascular Institute, one of the preeminent cardiovascular centers on the West Coast, is well respected for delivering the highest level of quality care. The Corporation was named one of the nation's 100 Top Hospitals® for cardiovascular care by Thomson Reuters in 2009. Hoag Heart and Vascular Institute delivers comprehensive care for the cardiovascular patient, from emergency care to complex cardiovascular surgery. With respect to emergency heart care, angioplasty and cardiac stent placement services are available twenty-four hours a day. The Hoag Heart and Vascular Institute's team of cardiac surgeons have expertise in complex valve surgery including mitral valve repair, in addition to other advanced surgical techniques, such as minimally invasive heart surgery, surgical treatment of arrhythmia and robotic surgery. The Corporation has received high marks in two reports that evaluate hospital -based cardiac surgical programs: The Society of Thoracic Surgeons' ( "STS ") assessment of clinical performance and The Leapfrog Group's Hospital Quality and Safety Survey's examination of high risk treatments. In 2009, the STS designated the Corporation with a 3- star rating, the highest possible rating, achieved by only approximately 10 percent of the more than 700 hospitals nationwide that participated in the data submission from which the ratings were derived. The Leapfrog Hospital Quality and Safety Survey findings in 2009 also reflected the Corporation's excellence in cardiac surgery in an examination of procedural volume, surgical experience and outcomes. In June 2006, the Corporation introduced the new Hoag Heart Valve Center. The center offers screenings, diagnosis, treatment and surgical expertise, and is dedicated to patient and physician education, on -going clinical research and collaboration and early intervention. The Hoag Heart and Vascular Institute has also been involved in a series of clinical trials for carotid stents to evaluate the potential for these devices to prevent stroke. The Hoag Heart and Vascular Institute is one of a limited number of Regional Education Centers in California authorized to educate other physicians in this new technology. Hoag Heart and Vascular Institute specialties include • arrhythmia center • emergency treatment • cardiac catheterization lab • endovascular diagnosis and therapy • cardiac rehabilitation and cardiovascular • endovascular lab surgery • heart valve center • clinical trials & research • patient & community education • diagnostic & interventional cardiology • vascular surgery • electrophysiology services • vascular lab Hoag Heart and Vascular Institute has achieved national accreditation for all of its programs. In addition, its echocardiography laboratory received accreditation from the governing body of the Intersocietal Commission for the Accreditation of Echocardiography Laboratories (ICAEL). Hoag Heart and Vascular Institute also has the longest - running accreditation in Orange County for its vascular laboratory through the Intersocietal Commission for the Accreditation of Vascular Laboratories (ICAVL) and has received national accreditation for its cardiac rehabilitation program through the American Association of Cardiovascular and Pulmonary Rehabilitation (AACVPR). As part of a significant expansion effort for Hoag Heart and Vascular Institute, the Corporation plans to complete a major renovation of the existing cath lab suite. In addition, the Corporation plans to construct a new hybrid operating room and PACU /PREOP suite. Proceeds of the 2011 Bonds may be used to finance such capital expenditures. See also "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION — Capital Expenditures." A -16 Hoag Women's Health Services In October of 2005, the Corporation opened the Sue and Bill Gross Women's Pavilion (the "Pavilion "), located on the Newport Beach campus, which combines progressive technology with patient education and comfort. The building is a seven -story, approximately 345,000 square -foot facility, with 173 licensed beds and expanded clinical space. The Pavilion serves as the new main entrance and houses more than 15 services, including Women's Health Services, a Comprehensive Breast Center, Laboratory Services, Patient Registration, Patient Education and a hospitality center, as well as six operating rooms. Additionally, the Pavilion has been designed to address variables such as evolving technologies and healthcare delivery modalities, population growth, aging demographics and healthcare needs specific to Orange County residents. The many aspects of Women's Health encompassed in the Pavilion include a maternal /child program that provides advanced mother and infant care through the philosophy of family- centered maternity care. Also available is a wide variety of prenatal and postpartum education resources and support services. Total births were 5,560, or approximately 15 -18 per day, for the Fiscal Year ended September 2010. In June 2009, Hoag received designation as a certified Baby- FriendlyT"' birth facility by Baby - Friendly USA, a global program sponsored by the World Health Organization and the United Nations Children's Fund (UNICEF), which recognizes hospital and birthing facilities that offer an optimal level of care and education in lactation. Hoag Breast Care Center was recognized in July 2009 by the National Consortium of Breast Centers as a Certified Quality Breast CenterTM. The Corporation is the first hospital in Orange County and one of only six hospitals in the nation to receive this designation. With state -of -the art technology and expert sub - specialized radiologists, 50,000 mammograms a year are performed at Hoag Breast Care Center, making it the largest volume breast care center in Southern California, and one of the largest in the state in terms of volume of breast cancer diagnosed and treated. Hoag Breast Care Center provides the latest in direct -to- digital mammography, dedicated breast MRI, breast ultrasound and minimally invasive breast biopsy and state -of -the -art breast surgery, including oncoplastics. Additionally, Hoag Breast Care Center participates in ground - breaking research and clinical trials, including tomosynthesis and Intraoperative Radiation Therapy, and remains a pioneer in advanced breast surgical techniques through its breast fellowship program. The Corporation's Sexual Medicine Program addresses sexual health and intimacy issues for women of all ages and sexual orientation, specializing in those with chronic or life threatening illness. Additional Hoag Women's Health Services include: • pregnancy & prepared childbirth • obstetrics and gynecology education • urogynecology • neonatal intensive care • minimally invasive gynecological surgery, including robotics Hoag Neurosciences Institute • gynecologic oncology • non - surgical alternatives in gynecological care The Hospital is one of only a few medical centers in Orange County with a dedicated neurosciences center, offering prevention, diagnosis, management and treatment for complex neurological conditions including stroke, brain tumors, dementia, epilepsy, Parkinson's disease, sleep disorders and more. In 2010, Hoag Neurosciences Institute aggregated certain outpatient and administrative leadership services at one location on the Corporation's Newport Beach campus. This new multispecialty facility, which occupies approximately 16,000 square feet, now houses neurosurgeons, neurology, orofacial pain, neuropsychology specialists, as well as memory/cognitive disorders and comprehensive pain syndrome specialists. Directly across from the facility is the Marilyn Herbert Hausman Advanced Technology A -17 Pavilion providing the latest neurodiagnostic imaging and Gamma Knife treatment technology. Additional services that make up the wide breadth of advanced care offered by Hoag Neurosciences Institute are located throughout other areas of the hospital. These include the Stroke Program, Parkinson's /Movement Disorders Program, Orange County Vital Aging Program, Epilepsy Center, Judy & Richard Voltmer Sleep Center, Voice & Swallowing Center, and Neurodiagnostics, among others. Incorporating the latest diagnostic technologies, treatment modalities and integration of medical specialists, Hoag Neurosciences Institute delivers the highest quality care for complex neurological disorders, including: • Alzheimer's /Dementia • Multiple sclerosis • Brain tumors • Neurobehavioral disorders • Brain aneurysms /vascular malformations • Pain and sensory disturbances • Epilepsy • Sleep disorders • Headache • Spinal tumors • Movement disorders/Parkinson's disease 0 Stroke Hoag Neurosciences Institute provides an integration of services specializing in the following: • Deep brain stimulators • Epilepsy monitoring • Gamma Knife • Interventional neuroradiology • Neurodiagnostic lab • Neuro hospitalists • Neurology • Neuropathology • Neuropsychology • Neuro radiation oncology • Neuroradiology • Neuro rehabilitation • Neurosurgery • Sleep lab The Corporation's brain tumor program is the largest in Orange County, offering the only stereotactic program (Gamma Knife) in Orange County, and is also among the top volume programs in the western United States. Hoag Neurosciences Institute is also one of the first centers in the U.S. to offer one of the most advanced radiosurgical treatment systems available, Leksell Gamma Knife® PerfexionT . The following is a list of recent awards and recognitions received by Hoag Neurosciences Institute: • The American Stroke Association awarded the Corporation's Neurosciences Center of Excellence Stroke Program with the 2009 Get With The Guidelines -Stroke Gold Performance Achievement Award for the team's continued commitment and success in providing a higher standard of stroke care. • The Corporation's Stroke Program earned certification from Det Norske Veritas Healthcare, Inc. ( "DNV Healthcare ") for Primary Stroke Centers. • In 2009, the Corporation was designated as a Stroke - Neurology Receiving Center (SNRC) by the Orange County Health Care Agency, one of only nine hospitals in Orange County. • In 2009, the Corporation received the Sum Total Systems Innovation Award for dementia education, recognizing it for its tremendous vision, innovation and achievement through the use of talent development strategies. Irvine Campus In July 2008, the Corporation achieved a significant milestone in its 55 -year history. The Corporation entered into a long -term agreement to lease a hospital facility allowing it to establish a second A -18 Hoag Hospital campus in the community of Irvine. With the completion of state licensure and Medicare certification processes for the Irvine facility in late 2010, Hoag Hospital Irvine, a second hospital campus of the Corporation, opened on September 1, 2010 and currently operates as an 84 bed acute care hospital. Hoag Orthopedic Institute, a 70 bed Specialty Hospital of HOI, opened on November 19, 2010. See "Hoag Orthopedic Institute" below. The approximately 240,000 square foot facility is the site of a former hospital, established approximately 19 years ago. The facility is owned by HCP, Inc., a healthcare REIT, and had been previously operated by Tenet Healthcare Corporation as Irvine Regional Hospital until its closure. The Corporation's lease with HCP has an initial term of 15 years with two 10 -year extension options and a purchase option which the Corporation may exercise ten years following commencement of the lease. The Corporation obtained possession of the closed facility directly from HCP in February 2009. Hoag Hospital Irvine is a new hospital subject to all the significant risks facing hospitals in California and, as a start-up, additional significant risks related to capturing and maintaining market share and patient revenues on a cost effective basis. See the section of the Official Statement entitled "BONDOLDERS' RISKS." The Corporation opened Hoag Hospital Irvine with its existing Medical Staff. See also "MEDICAL STAFF" above. In the aggregate, the Hoag Hospital Irvine undertaking and the orthopedic joint venture are financially and operationally material to the Corporation. The Corporation's Hoag Hospital Irvine division incurred pre - operating expenditures in the amount of $27 million in Fiscal Year 2010, classified as non- operating expenditures. Post - opening of Hoag Hospital Irvine, the Corporation expects the division operating expenses to exceed revenues in Fiscal Years 2011 and 2012. Post - opening of HOI, the Corporation expects the joint venture's operations, inclusive of the ambulatory surgery centers, to generate positive cash flow in Fiscal Years 2011 and 2012. The Corporation expects the combined results, comprised of the operations of Hoag Hospital Irvine and HOI, to achieve positive combined cash flows following the first full year of operations. These projections are estimates only and actual results may vary from the projections. Hoag Hospital Irvine After nearly 18 months of intense planning and renovations, Hoag Hospital Irvine officially opened its doors to the community on September 1, 2010. The extensive redesign and full -scale modernization effort has transformed the existing facility into a state -of -the -art acute care general hospital. Hoag Hospital Irvine provides a wide array of inpatient and outpatient services, including a fully staffed emergency room completely re- engineered to improve the speed and quality of emergent care. From larger operating rooms featuring the latest technology and some of the most advanced imaging equipment available, to enhanced aesthetics and interior design elements, the facility has been retooled to meet the needs of the community. The expansive $84 million renovation effort was completed ahead of schedule and on budget. Hoag Hospital Irvine offers a variety of services, including an expanded and more efficient emergency room, larger and more advanced operating rooms, progressive cardiac care, dedicated service from hospitalists (inpatient care) and intensivists (critical care) 24 -hours a day /seven days per week. The Irvine campus is also home to Hoag Orthopedic Institute, a specialty orthopedic hospital, focused primarily on orthopedic surgery for adults, including joint replacement, hip, knee and shoulder replacement; spine surgery; and trauma- related surgery that requires inpatient care. Additional orthopedic services will be available at outpatient facilities throughout Orange County, including specialty care in foot and ankle, sports medicine, hand and rheumatology. See also "Hoag Orthopedic Institute" below. Hoag Orthopedic Institute Hoag Orthopedic Institute, LLC ( "HOI ") is the most significant Other Affiliate of the Corporation. It is not a member of the Obligated Group. See "ORGANIZATIONAL STRUCTURE--Other Affiliated Entities Not Members of the Obligated Group." HOI operates the orthopedic surgery Specialty Hospital at the Irvine campus, in addition to two outpatient surgery centers. The Specialty Hospital occupies A -19 approximately 40% of the overall Irvine campus, and operates 70 licensed beds together with 7 operating rooms. Its operations are separate from those of the Corporation. HOI has its own medical staff consisting of over 70 physicians. Currently, all orthopedic surgeons at the Specialty Hospital are also members of the Corporation's medical staff. The Specialty Hospital operates under its own licensure and is subject to certain requirements regarding the separateness of each facility, including without limitation, requirements for separate plant structures, separate systems and sufficient patient privacy. See the section of the Official Statement entitled "BONDHOLDERS' RISKS — Regulatory Environment" and "— Nonprofit Health Care Environment." The Corporation provides the Specialty Hospital facility to HOI pursuant to a sublease of the affected portion of the Irvine campus. The Corporation provides substantially all of the workforce for HOI under an employee lease agreement, and provides comprehensive administrative and clinical support services to HOI under an administrative services and a purchased services agreement. Revenues received by the Corporation pursuant to these assorted services agreements will comprise operating revenues of the Corporation. Income received by the Corporation from its ownership interest in HOI, if any, will be recognized by the Corporation as non - operating income. The services agreements have limited terms and may be subject to early termination and subsequent revision by agreement of the parties. Pursuant to the Operating Agreement of HOI, its principal governing instrument (the "Operating Agreement "), HOI's principal business is to own and operate the Specialty Hospital in Irvine and related outpatient services, including ambulatory surgery centers in Orange County. Pursuant to the Operating Agreement, HOI is to conduct its business and operations so as not to endanger the Corporation's federal tax exemption (or that of any tax exempt affiliate of the Corporation), and in a manner consistent with the operational principles applicable to tax exempt organizations and the Corporation's charitable mission of providing health care services to the community. To this end, under the Operating Agreement, the Corporation is guaranteed the ownership of 51% or greater membership interest in HOI and as such is entitled to initiate, veto or override any action or decision by HOI including any action or decision that could or would affect in any manner the Corporation's non -profit purpose, charitable mission or tax exempt status, and to take affirmative action unilaterally as it deems necessary to protect or further its tax exempt purposes. To provide working capital for HOI, the Corporation has provided a line of credit of up to $15,000,000. As of December 31, 2010, HOI has drawn $3 million under the line of credit. HOI is in negotiations for a commercial line of credit which would repay the Corporation's line of credit in full, after which the Corporation line of credit would be terminated. The Corporation believes the line of credit should be sufficient to fund HOI's requirements for start-up working capital and equipment, although the Operating Agreement allows additional voluntary capital contributions of members commensurate with members' respective equity positions. The Specialty Hospital will participate in the Medicare and Medical programs and bill private insurance and private pay patients at customary and reasonable levels. HOI has, and will continue to adopt and follow charity care policies that are comparable to those adopted and followed by the Corporation at its facilities, and such policies will be under the exclusive control of the Corporation as the owner of a majority interest of the ownership interest of HOL The business of HOI is subject to substantially all of the business risks and pressures to which the Corporation is subject. See the section of the Official Statement entitled "BONDHOLDERS' RISKS." In addition, the Specialty Hospital is subject to the special risks of hospital joint ventures and the unique competitive pressures associated with an orthopedic specialty hospital providing services for elective surgery. See the section of the Official Statement entitled "BONDHOLDERS' RISKS - " Moreover, by reason of the Corporation's controlling interest in HOI and the primacy of the Corporation's charitable purposes which are made applicable to HOI pursuant to the Operating Agreement, the operations of HOI will be further constrained by the Corporation's charitable purposes, activities and restrictions. See the section of the Official Statement `BONDHOLDERS' RISKS — Nonprofit Health Care Environments." A -20 HOI has the largest orthopedic specialty medical staff in Orange County, including more than physicians specializing in advanced orthopedic and spine procedures, including minimally invasive techniques and total joint replacement. Based on State of California Office of Statewide Health Planning and Development ( "OSHPD ") data for the ten years ended as of December 2007, the Corporation's orthopedic medical staff, including those presently comprising part of HOI's staff, performed more orthopedic inpatient procedures than any other hospital in Orange County and more total joint replacements (hip and knee) than any other hospital in California. With the formation of HOI and the licensure and opening of the Specialty Hospital, HOI has acquired the Corporation's orthopedic elective surgery line of business formerly conducted at the Newport Beach campus. HOI's Specialty Hospital effectively relocates the Corporation's former Orthopedic Center of Excellence to HOI at the Irvine campus. This transfer of service allows for the consolidation and expansion of substantially all orthopedic services within HOI and the Specialty Hospital. The Corporation will continue to provide certain orthopedic inpatient services, including non - elective surgeries and other limited inpatient and outpatient services, such as spine/back surgeries, in a manner consistent with the HOI Operating Agreement. The Corporation's financial commitment to HOI consists of (1) contribution of the Corporation's equity ownership interests in two surgery centers, cash, intangible assets and certain fixed assets totaling $34.9 million, (2) the build -out of the Irvine campus of which $18 million was attributed to HOI and will be recaptured through the sublease agreement between the Corporation and HOI, and (3) the extension of credit support in the form of a $15 million line of credit as described above. The Corporation's investment in HOI is reflected as "Other Assets" in the supplemental other financial information to the Corporation's audited financial statements. HOI is expected to be cash flow positive as it has acquired the Corporation's existing orthopedic elective surgery line of business. HOI and the Corporation in its dealings with HOI are subject to significant legal and regulatory constraints. Currently pending legislation may affect the Corporation's ability to pursue or implement this strategy. See the section of the Official Statement entitled `BONDHOLDER'S RISKS — Business Relationships and Other Business Matters" and "— Regulatory Environment." There can be no assurance that HOI or the Specialty Hospital will be successful, or the ultimate impact on the Corporation. Hoag Health Centers and Medical Office Buildings In furtherance of its commitment to community-based healthcare, the Corporation operates seven medical office buildings ( "Health Centers ") outside its Newport Beach and Irvine campuses. The Health Centers are located in the communities of Irvine (approximately 21,000 square feet), North Irvine – Woodbury (approximately 5,800 square feet), Huntington Beach (approximately 53,000 square feet), Costa Mesa (approximately 20,000 square feet), Aliso Viejo (approximately 33,000 square feet), Fountain Valley (approximately 8,100 square feet) and Newport Beach (approximately 330,000 square feet). The Corporation owns the facilities and land at the Huntington Beach, Irvine and Aliso Viejo Health Centers, and leases space in the Costa Mesa, Fountain Valley and North Irvine – Woodbury Health Centers. The Health Center in Newport Beach is owned and operated by Newport Healthcare Center, LLC, a wholly -owned subsidiary of the Corporation and a Member of the Obligated Group as defined in the Master Trust Indenture, dated as of May 1, 2007 (the "Master Indenture "). From time to time, the Corporation considers opportunities with regards to its Health Centers and other real estate holdings, including possible sale or monetization of properties. The Corporation would only undertake such an opportunity if, following management and Board review, it was deemed to benefit the Corporation's finances or operations, and to fit within the strategic direction of the organization. Expansion of the Corporation's ambulatory care system into adjoining communities could involve significant expansion of this line of business. See "POTENTIAL AFFILIATIONS AND TRANSACTIONS." A -21 Newport Healthcare Center In February 2006, Newport Healthcare Center, LLC ( "NHC "), a wholly -owned subsidiary of the Corporation, purchased an approximately 330,000 square -foot office complex located several blocks north of the Corporation's Newport Beach campus and referred to as "Hoag Health Center — Newport Beach ". The office complex provides space for outpatient clinical services, as well as physician medical office space and certain administrative support functions. The Corporation leases approximately 50% of the leaseable space in Hoag Health Center — Newport Beach from NHC. One of the primary services available at Hoag Health Center — Newport Beach is Hoag Outpatient Imaging. The outpatient imaging center, approximately 33,500 square feet, offers state -of -the -art technology, including computed tomography ( "CT ") scan, magnetic resonance imaging ("MR]") and diagnostic radiology, outpatient ultrasound and nuclear medicine. Hoag Outpatient Imaging center allows ease of access and efficiency of service for patients who previously had to undergo testing inside the hospital. In June 2009, the Corporation opened the Mary & Dick Allen Diabetes Center (the "Allen Diabetes Center "), an approximately 7,000 square foot facility, which provides comprehensive services for adults and children with diabetes, including physician specialty services in endocrinology, ophthalmology and podiatry. The Allen Diabetes Center also offers other educational and support services designed specifically to meet the needs of patients with diabetes and their families. Programs include medical nutrition therapy, American Diabetes Association accredited diabetes self - management education and "Sweet Success" for pregnant women with diabetes. The mission of the Allen Diabetes Center is to make a difference by improving the quality of life for all people with diabetes or at risk of diabetes, through prevention, early detection, prompt care, education and support. In addition, the Corporation offers rehabilitation services, including occupational therapy, physical therapy, pulmonary rehabilitation, speech therapy and wound healing. The Rehabilitation Center occupies approximately 30,000 square feet of the space at Hoag Health Center — Newport Beach. Additional outpatient clinical services offered at Hoag Health Center — Newport Beach include the Judy & Richard Vollmer Sleep Center., Hoag Voice and Swallowing Center, outpatient lab services, pre- admission screening and Children's Hospital of Orange County (CHOC) pediatric sub - specialty clinic. NEC has obtained city land use approvals to fully transition the property to medical office space. Leasing of medical office space commenced in the latter half of 2008, with 90% of the site currently occupied. The estimated cost to be incurred in Fiscal Years 2011 through 2015 for further development of the NHC property is approximately $15 million and is comprised primarily of further tenant improvements and site development; however, the ultimate uses for Hoag Health Center — Newport Beach are subject to change. In January 2008, NHC purchased a medical office building, known as Newport Medical Center, in close proximity to the Newport Beach campus. The building, which provides approximately 24,000 square feet of leaseable space, is currently 54% occupied. The leases are subject to different terms and there can be no assurance that the various leases will be renewed at the time of expiration. As of September 30, 2010, NHC represented 7% of the Total Assets of the Obligated Group. NHC generated $7 million of revenue and $1.3 million of net income in Fiscal Year 2010. See "SELECTED UTILIZATION AND FINANCIAL INFORMATION." For federal tax purposes, NHC is treated as a disregarded entity and a division of the Corporation. Outpatient Surgery Facilities The Corporation currently operates two free - standing facilities for outpatient surgery. The first, the James Irvine Surgery Center, was opened on the Corporation's Newport Beach campus in 1972 and A -22 contains three operating rooms. The second, Newport Surgicare, opened in 1983 and contains four operating rooms; it is located four miles from the Corporation's Newport Beach campus in one of four major medical office buildings in the Newport Center area of Newport Beach. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] A -23 SERVICE AREA AND COMPETITION Service Area The Corporation operates two acute care hospital facilities — one in Newport Beach, California, on the coast of the Pacific Ocean, and the other in the City of Irvine, California. The Corporation defines its service area by patient origin, geographic accessibility to its healthcare facilities and location of a majority of the physician offices of its medical staff. The Corporation's Primary Service Area ( "PSA ") includes Newport Beach/Corona Del Mar, Costa Mesa, Huntington Beach, Irvine, Fountain Valley and Laguna Beach. 66% of its inpatient discharges for the Fiscal Year ending September 30, 2010 were from the Primary Service Area. Hoag Hospital Service Area wmrer Gar o Alhw HmoN I. Habra Norco ,,, cam,lor, - Narrakf .Moatla . ParNn���p1 � fmdnna ° c ha lrmN � Msnn Ga Buena Pulk ° Corona[ e a °Carson 1 keWOntl IaF&M 9", ' SINN l'L 91N2 i_ Lake WetCersun :`r �: �, .. ,. BCeMO NaMm Anaheim z NORTH s , "'° . rni Orange anion on ,nsu. . c. axn ,Long Beach W Grove A -- esbNlns,nr Carden f 'no 9 S.F 0,1- ^`° TWtln rx,c ,,, Beach Santa Ana "" B NWa. s PSA NE 1 HunBn9[on So+^ 9isie Beach ��m, '•. ` r sv Mesas al,c 9tc,n n'i nr W"w- I? © +. I. lake Form Wesion .: 'r, no,`,p .u. cam pA o nep �°' � ^° SOUTH ©- Hoag Hospital ° vrsvo Gall a,SaaM Cata „n DA My toga ' ta . aT QaWhe PrBl Laguna - - -- -- „ wvnanmxm, uonwn coin ..e'�...'4wbe.z a•a:: �rw.w0 c e a n �,,,CWiman yr Primary Service Area includes Newport Beach/Corona Del Mar, Costa Mesa, Huntington Beach, Irvine, Fountain Valley, and Laguna Beach. Core Primary Service Area includes Newport Beach, Newport Coast, Coronal Del Mar, Costa Mesa & Laguna Beach. South Service Area includes Aliso Viejo, Capistrano Beach, Dana Point, Foothill Ranch, Ladera Ranch, Laguna Hills, Laguna Niguel, Lake Forest, Mission Viejo, Rancho Santa Margarita, San Clemente, San Juan Capistrano, and Trabuco Canyon. North Service Area includes Buena Park, Cypress, Garden Grove, La Palma, Los Alamitos, Westminster, Seal Beach, and Stanton. Central Service Area includes Anaheim, Brea, Fullerton, La Habra, Orange, Santa Ana, Tustin, and Yorba Linda A -24 Irvine Campus In September 2010, the Corporation opened Hoag Hospital Irvine. The City of Irvine has a population of approximately 201,000 and has no general acute care hospital other than a facility owned and operated by Kaiser Permanente, a health maintenance organization, which opened in 2008. Garden -'yr Orange Grove er onr ton I Market Share and Competition The following illustrates market share data for some of the general acute care providers of service for the Corporation's Primary Service Area for the calendar years 2007, 2008 and 2009. These data are based solely upon discharges from the Corporation's Primary Service Area which are determined by zip code. The 2009 data is the most recent data available. The Corporation's market share has remained the highest in the service area over the three years shown. Hospital 2007 2008 2009 Hoag Memorial Hospital Presbyterian 34.7% 34.9% 36.2% Orange Coast Memorial Medical Centert't 9.5 8.9 8.8 Fountain Valley Regional Hospital & Medical Center [21 8.5 8.1 8.8 Kaiser - Anaheim/Irvine [71 2.5 5.2 7.6 Huntington Beach Hospital & Medical Center141 4.7 4.3 4.2 St. Joseph Hospital- Oranget51 3.4 3.5 4.0 University of California - Irvine Medical Centert" 3.1 3.2 3.5 Saddleback Memorial Medical Center[]] 2.2 2.4 3.1 Western Medical Center- Santa Anatst 1.9 1.7 2.1 Mission Hospital Regional Medical Centert5191 1.5 1.6 1.9 South Coast Medical Center [5,9] 1.9 1.9 1.6 Coastal Communities Hospital[" 1.4 1.2 1.2 Irvine Regional Hospitalt2'31 7.1 5.8 0.1 A -25 Source for Market Share Information: Office of Statewide Health Planning and Development, State of California. Excludes discharges with DRG =391 or MS -RG 795 (normal newborns). The following footnotes each indicate the name of the system or organization that owns or operates the referenced facility: I O Memorial Care t21 Tenet Healthcare Corporation 131 Tenet Healthcare Corporation closed the Irvine facility in early 2009. The Corporation opened Hoag Hospital Irvine at this site in September 2010. t4l Prime Healthcare Services, Inc. [51 St. Joseph Health System te1 University of California [�1 Kaiser Foundation Hospitals. Kaiser Irvine opened in 2008. [s1 Integrated Healthcare Holdings Inc. I91 Adventist Healthcare. South Coast Medical Center was sold to St. Joseph Health System and licensed as part of Mission Hospital Regional Medical Center in 2009. The following illustrates the Corporation's market share in Orange County, California: 11.0% 10.5% 9.9% 10.0% v fy 10.0% s 9.6% H v 9.5% s 8.8% 9.0% 8.9% 9.0% O 8.6% 8.6% 8.5% 8.0% 10.4% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Office of Statewide Health Planning and Development (OSHPD) inpatient discharge data Demographics The following table presents an estimate of population growth in Orange County. The Corporation's Primary Service Area is estimated to experience an approximately 6.0% increase in population through 2015. The Corporation provides no assurance regarding the accuracy of such estimates. Orange County Area 2010 Primary Service Area 694,950 North 494,233 Central 1,332,602 South 577,244 Total Orange County 3,099,029 2015 % Change 736,979 6.0% 511,537 3.5 1,388,345 4.2 609.863 5_7 3,246,724 4.8% * Source: Thomson Reuters' Market Expert using information provided by Claritas. A -26 The table below summarizes average income per household for the calendar year 2010 for each of the Corporation's Service Areas (as referenced below and defined above). The Corporation provides no assurance regarding the accuracy of the household and average income numbers below. Core Primary Service Area til Number of Households 90,807 • Household Income > $75,000 54.7% • Household Income> $100,000 40.6% Primary Service Area Number of Households 262,475 • Household Income > $75,000 57.3% • Household Income > $100,000 42.5% South Service Area Number of Households 209,121 • Household Income > $75,000 61.5% • Household Income > $100,000 46.6% North Service Area Number of Households 149,508 • Household Income > $75,000 42.2% %Household Income> $100,000 27.0% Central Service Area Number of Households 381,258 • Household Income> $75,000 44.1% • Household Income> $100,000 29.5% l'l The Corporation's Core Primary Service Area includes Newport Beach, Newport Coast, Comnal Del Mar, Costa Mesa & Laguna Beach. Source: Thomson Reuters' Market Expert using information provided by Claritas. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] A -27 SELECTED FINANCIAL AND OPERATING INFORMATION Summary Historical Financial Data The following statement of operations and balance sheet of the Obligated Group for the Fiscal Year period ended September 30, 2010, is derived by management from the consolidating statements of operations and balance sheets to the consolidated financial statements of the Corporation and Affiliates, which are included with the unaudited "Other Financial Information" following the audited consolidated financial statements in APPENDIX B (the "Audited Financial Statements "). For purposes of analysis by the Corporation's management, the financial information of the Obligated Group is consolidated and presented in the column named "Hospital and NHC" in the consolidating statements of operations and balance sheets to the Annual Financial Statements. The summary of financial information should be read in conjunction with the consolidated financial statements and related notes contained in APPENDIX B hereto. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] A -28 Hoag Memorial Hospital Presbyterian Obligated Group Consolidating Balance Sheet (in thousands) Current assets: Cash and equivalents Patient accounts receivable, net of allowance for doubtful accounts Investments Board designated investments for short-term cash needs Other receivables Other current assets Due from related entities Total current assets September 30, September 30, 2009 2010 $ 138,353 $ 69.,272 71,522 82,468 5,824 12,102 183,376 259,688 12,811 8,014 12,620 13,322 2,336 1,455 426,842 446,321 Assets limited as to use: 17,184 35,447 Board designated investments for capital improvements 658,425 648,535 Under indenture agreement held by trustee 6,870 65 Cash collateral held by swap counterparty 7,962 28,835 Under malpractice claims funding arrangement held by trustee 13,379 14,356 Total assets limited as to use 686,636 691,791 Noncurrent donations and bequests pledged, net of allowance for 44,335 12,431 doubtful accounts and unamortized discount 5,302 5,302 Property and equipment, net 749,640 837,376 Intangibles, net 1,942 1,892 Other assets 50,628 54,336 Total assets Current liabilities: Accounts payable Accrued. expenses: Payroll and payroll taxes Employee benefits Other Accrued liabilities under capitated contracts Estimated third -party payer settlements Current portion of bonds payable Total current liabilities Self - insurance liabilities Bonds payable, less current portion Interest rate swap Other long -term liabilities Total liabilities Net assets: Unrestricted Temporarily restricted Permanently restricted Total net assets Total liabilities and net assets A -29 $ 1,920,990 S 2,037,018 29,351 $ 45,868 12,791 17,184 35,447 42,560 10,883 7,904 14,278 17,457 688 538 70,095 143,305 173,533 274,816 17,793 18,243 467,806 392,261 29,366 44,335 12,431 15,957 700,929 745,612 1,214,552 1,285,897 5,509 5,509 1,220,061 1,291,406 $ 1,920,990 $ 2,037,018 Hoag Memorial Hospital Presbyterian Obligated Group Consolidating Statement of Operations (in thousands) Unrestricted operating revenues: Net patient service Capitation Other Total unrestricted operating revenues Operating expenses: Salaries and employee benefits Professional fees Provision for doubtful accounts Supplies Utilities Insurance Lease rental Other (A) Purchased services Depreciation and amortization Interest related to interest rate swap agreement Interest Total operating expenses Income (loss) from operations Other income (expense): Investment income, net Change in fair value of interest rate swap Other non - operating losses Other income (expense), net Excess (deficiency) of revenues over expenses Year Ended September 30, 2009 2010 $ 627,915 $ 675,263 73,230 75,109 25,795 22,585 726,940 772,957 324,992 346,967 11,976 13,743 26,144 29,083 122,045 133,890 8,151 8,093 3,094 2,267 7,125 7,633 30,558 28,874 82,390 88,975 56,358 55,322 5,714 7,016 11,793 10,247 690,340 732,110 36,600 40,847 22,607 68,586 (15,066) (14,969) (16,956) (28,367) (9,415) 25,250 27,185 66,097 Transfers from Hoag Hospital Foundation 15,343 2,920 Appreciation in assets contributed to joint venture 4,853 796 Appreciation in value of investment in joint venture - 1,532 Increase in unrestricted net assets $ 47,381 $ 71,345 A -30 Sources of Patient Services Revenue The Corporation receives payment for its services from several sources with a variety of payment arrangements. Insurance payments include preferred provider organizations (PPOs) and health maintenance organizations (HMOs). The federal government, through the Medicare program, pays for most services for persons over 65 years old and the State of California and the federal government pay for indigent patients through the Medi -Cal program. Orange County also funds certain indigent patients through the Medical Services for the Indigent (MSI) program and other patients through the Cal- Optima program. The following table shows the Corporation's distribution of gross patient revenue by payer for the past three fiscal periods. Fiscal Periods Ended Includes capitated commercial and Medicare contracts. For a further discussion of risks and uncertainties pertaining to Medicare, Medi -Cal and other payors, please refer to the section of this Official Statement entitled `BONDHOLDERS' RISKS — Healthcare Reform Initiatives" and "— Patient Service Revenues." Historical Utilization The Corporation's utilization statistics for the Fiscal Years ended September 30, 2010 and 2009 are presented below. Licensed Beds — acute care Inpatient Statistics Staffed Beds — acute care Discharges Average Length of Stay (days) Patient Days — acute care Births Percent Occupancy (staffed bed)* Average Daily Census — acute* Case Mix Index —All Case Mix Index — Medicare Outpatient Statistics Emergency Visits Outpatient Visits Outpatient Surgeries Total Outpatient Volume Fiscal Year Ended September 30, 2010 582 511 28,827 4.2 120,960 5,560 78% 331 1.48 1.83 71,645 269,689 10 830 352.164 A -31 Fiscal Year Ended September 30, 2009 498 413 29,532 4.1 119,490 5,620 79% 327 1.42 1.72 70,543 266,542 9 728 346.813 September 30, 2010 September 30, 2009 September 30, 2008 Medicare 36.03% 35.0% 34.5% PPO 24.62 25.6 25.9 HMO (1) 28.74 30.2 30.4 Medi -Cal & MSI 4.81 4.5 4.5 Other 5.8 4.7 4.7 Includes capitated commercial and Medicare contracts. For a further discussion of risks and uncertainties pertaining to Medicare, Medi -Cal and other payors, please refer to the section of this Official Statement entitled `BONDHOLDERS' RISKS — Healthcare Reform Initiatives" and "— Patient Service Revenues." Historical Utilization The Corporation's utilization statistics for the Fiscal Years ended September 30, 2010 and 2009 are presented below. Licensed Beds — acute care Inpatient Statistics Staffed Beds — acute care Discharges Average Length of Stay (days) Patient Days — acute care Births Percent Occupancy (staffed bed)* Average Daily Census — acute* Case Mix Index —All Case Mix Index — Medicare Outpatient Statistics Emergency Visits Outpatient Visits Outpatient Surgeries Total Outpatient Volume Fiscal Year Ended September 30, 2010 582 511 28,827 4.2 120,960 5,560 78% 331 1.48 1.83 71,645 269,689 10 830 352.164 A -31 Fiscal Year Ended September 30, 2009 498 413 29,532 4.1 119,490 5,620 79% 327 1.42 1.72 70,543 266,542 9 728 346.813 *Licensed and staffed beds were 498 and 413, respectively, in fiscal year 2010 until September 1, 2010 when Hoag Hospital hvine was added to the Corporation's license. Occupancy figures are reported from pre -HHI bed capacity. Capitalization The following table sets forth the capitalization for the Obligated Group as of the fiscal year ended September 30, 2010. The pro forma capitalization has been adjusted to reflect (i) the refunding of the $73.2 million of the Series 2009B and C Bonds and (ii) the issuance of $ of 2011 Bonds, as if such transactions had occurred on September 30, 2010: Actual Pro Forma September 30, 2010 September 30, 2010 - (000's)- Outstanding Long -Term Debt $531,120 $531,120 Less: Refunded Bonds Plus: The 2011 Bonds 55,322 Subtotal 531,120 Total Net Assets 1,291,406 1,291,406 Total Capitalization $1,822,526 $ Percent Long -Term Debt to Capitalization 29.1% % Estimated Debt Service Coverage The following table sets forth the Obligated Group's estimated debt service coverage for the fiscal year ended September 30, 2010. The pro forma debt service coverage has been adjusted to reflect the issuance of the 2011 Bonds as if such transaction had occurred on October 1, 2009, in the aggregate principal amount of $ . There can be no assurance that the Obligated Group will generate income available for debt service in future years comparable to historical performance. Pro Forma Fiscal Year Ended Fiscal Year Ended September 30, 2010 September 30, 2010 (Deficiency) Excess of Revenue over $66,097 Expenses( Plus: Depreciation and Amortization 55,322 Plus: Unrealized Losses due to Changes in 14,969 Fair Value of Interest Rate Swaps Less: Unrealized Gains on Investments(') (36,744) Plus: Interest 17263 Income Available for Debt Service $116,907 Maximum Annual Debt Service, as adjusted TBD (3) Debt Service Coverage Ratio (times) TBD (1) Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at fair value. In accordance with the AICPA Audit and Accounting Guide, Health Care Organizations (the "Guide ") the Corporation classifies its investment portfolio as "trading." The Guide requires that the changes in A -32 unrealized gains and losses on marketable securities designated as "trading" be reported within the excess of revenue over expenses. Therefore, all investment income or loss (including realized and unrealized gains and losses on investments, interest and dividends) is included in the investment income within the (deficiency) excess of revenue over expenses. In addition, the Corporation has adopted the equity method of accounting for certain investments in partnerships, limited liability companies and similarly structured entities. Under the equity method of accounting, the Corporation records its proportionate share of income or loss reported by the underlying entity. All investment earnings or losses (both realized and unrealized) on investments accounted for under the equity method of accounting are recognized and recorded as investment income within the (deficiency) excess of revenue over expenses. However, for purposes of calculating the debt service coverage ratios, the Corporation has adjusted Income Available for Debt Service to exclude all changes in unrealized gainsAosses in accordance with the provisions of the Master Indenture dated as of May 1, 2007, as supplemented and amended. (2) The presentation of Income Available for Debt Service does not include transfers to the Obligated Group Members from Hoag Hospital Foundation and certain adjustments for extraordinary gains or losses. Thus, it does not correlate to the determination of Income Available for Debt Service under the Master Indenture dated as of May 1, 2007, as supplemented and amended. X31 The actual and pro forma Maximum Annual Debt Service ( "MADS ") is calculated based on certain assumptions of interest and amortization of existing debt as delineated in the Master Indenture for circumstances where actual debt service is not determinable as of the date of this Official Statement. For purposes of calculating pro forma MADS, (i) the interest rate used on $250 million of indebtedness subject to swap agreements was 3.229 %; (ii) the rate used on the Long -Term Interest Rate Bonds was the actual rate during the Initial Long -Term Interest Rate Period, and, thereafter, the 30 -year Revenue Bond index rate as of May 19, 2009; and (iii) the rate used for the remaining variable rate bonds was the 30 -year Revenue Bond index rate as of May 19, 2009. For purposes of calculating actual MADS, the following interest rates were used: (i) for the Series 2007D Bonds, the 12 -month average rate of 3.562 %; (ii) for the Series 2008A, 2008B and 2008C Bonds, 5.46 %, which is the 30 -year Revenue Bond index rate as of May 19, 2009, and (iii) for the Series 2008D, 2008E and 2008F Bonds, 3.229 %, which is the fixed rate under the Interest Rate Swaps. In addition, the calculation of MADS assumes a 100% effective swap and does not include adjustment for basis risk, i.e., the calculation assumes that the swap floating rate received equals floating rate paid. The actual interest rates and amortization may vary from these assumptions and could have the effect of increasing or decreasing actual maximum annual debt service and debt service coverage ratios. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION Historical Performance Results of Operations For the Fiscal Year ended September 30, 2010, the Corporation reported patient service revenue totaling approximately $675 million, in comparison to $628 million for the year prior. The approximately $47 million, or 7.5% increase, is due primarily to rate increases in commercial insurance plans. Inpatient discharges for the year totaled 28,827, down 2.4% from prior year while outpatient volume for the year totaled 352,134, a 1.5% increase over the prior year. The Emergency Department experienced growth of 1.6% while outpatient surgeries increased 11% over the prior year. Referred outpatients, which include services such as imaging and lab, grew at 0.9% during the year. For the fiscal period ended September 30, 2010, the Corporation reported revenue earned on prepaid contracts of approximately $75 million in comparison to $73 million for the year prior. Revenue earned on prepaid contracts consists of revenue earned by the Corporation through capitated payment arrangements with payers and in connection with the Corporation's contractual relationship with Greater Newport. This relationship covers senior capitated contracts. As of September 30, 2010, the Corporation had approximately 11,600 senior lives covered under prepaid contracts. See also "ORGANIZATIONAL STRUCTURE — Integrated Physician Group Relationship" above. Other operating revenue of the Obligated Group was $23 million in the Fiscal Year ended September 30, 2010, as compared to $26 million for the prior year, and is comprised mainly of certain A -33 management agreements between the Corporation, its wholly -owned subsidiaries, as well as contributions from the Foundation in support of various programs. In total, operating revenues grew 6% over the year prior, reflective of strong market position and contracting strength. Salaries and benefits for the Fiscal Year ended September 30, 2010 totaled $347 million, a 6.8% increase over 2009 at $325 million. The increase in salaries and benefits is largely attributable to routine wage increases, in- sourcing of certain functions such as IT and certain start-up costs associated with the first month of operations for Hoag Hospital Irvine in September 2010. The Corporation's annual overall turnover rate remains below _% with nursing at approximately % for the Fiscal Year ended September 30, 2010. Additionally, the Corporation manages outside registry and traveler costs to less than 0.1% of labor. The Corporation staffs to the current state - mandated nurse - staffing ratios. Professional fees represent the Corporation's investment in certain physician coverage programs and medical directorships. Examples of coverage programs include contract physician hospitalists and intensivists, as well as obstetrics coverage, to provide needed patient care. For the Fiscal Year ended September 30, 2010, the Corporation reported professional fees of $14 million as compared to $12 million in 2009. Provisions for doubtful accounts totaled $29 million for the fiscal period ended September 30, 2010, as compared to $26 million for the prior year. This 11.5% increase in provision for doubtful accounts is primarily attributable to a 5% price increase implemented in 2010 as well as an increase in un- and underinsured patients that do not qualify for the Corporation's charity care program. Supplies expense for the fiscal period ended September 30, 2010, totaled approximately $134 million which represents an approximate 10% increase over the 2009 total of $122 million. The increase is largely due to an increase in surgically intensive cases as well as a significant increase in outpatient cancer volume with associated high pharmaceutical costs. Purchased services for the fiscal period ended September 30, 2010, totaled approximately $89 million as compared to $82 million for the year prior. Purchased services include such items as medical services, repairs and maintenance, IT- related maintenance fees and marketing. For the fiscal period ended September 30, 2010, depreciation and amortization expense totaled approximately $55 million, a 1.8% decrease over the prior year. Interest expense (including interest related to interest rate swap agreements) for the Fiscal Years ended September 30, 2010 and 2009 totaled approximately $17 million as compared to $18 million in 2009. See also "Certain Indebtedness and Liabilities" below. Total other expenses, including utilities, rent, insurance and other expenses totaled $47 million for the Fiscal Year ended September 30, 2010, a 4% decrease over prior year levels of $49 million. Overall, the Obligated Group's operations have remained financially strong despite softening inpatient volumes and minor payer mix shifts due to the external economic environment. Despite this difficult external environment, total operating revenue in the Fiscal Year ended September 30, 2010 grew 6% over the prior year. The Corporation continues to be successful in rate negotiations, implementing certain cost containment strategies, focusing on recruitment and retention and growing market share in its primary and secondary service areas, most exemplified by the opening of the Corporation's second hospital campus in 2010. It is management's expectation that downward pressure from payers and employers on rate increases will strengthen in 2011. However, management expects to maintain overall positive operating margins and strong cash flow margins while continuing to invest in facilities, programs and technologies to maintain and then grow market share, particularly in support of the Corporation's continuum of care strategies and continued market expansion, including into the Irvine community with the opening of the Hoag Hospital Irvine and HOI campus, as well as business model expansion into population health management. See also "HOAG HEALTH FACILITIES — Irvine Campus." A -34 Results offonoperatineActivity Investment Loss/Income. Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at fair value. In accordance with the AICPA Audit and Accounting Guide, Health Care Organizations (the "Guide "), the Corporation classifies its investment portfolio as "trading ". The Guide requires that the changes in unrealized gains and losses on marketable securities designated as "trading" be reported within the excess of revenue over expenses. Therefore, all investment income or loss (including realized and unrealized gains and losses on investments, interest and dividends) is included in the investment income within the excess (deficiency) of revenue over expenses. In addition, the Corporation has adopted the equity method of accounting for certain investments in partnerships, limited liability companies and similarly structured entities. Under the equity method of accounting, the Corporation records its proportionate share of income or loss reported by the underlying entity. All investment earnings or losses (both realized and unrealized) on investments accounted for under the equity method of accounting are recognized and recorded as investment income within the excess (deficiency) of revenue over expenses. Investment income for the Fiscal Year ended September 30, 2010, totaled $69 million in comparison to investment income of $23 million in prior year. The fluctuation in results between periods is due primarily to changes in market conditions and translates to a positive 8% return on Board - Designated investments for the Fiscal Year ended September 30, 2010. Achievement of investment objectives is subject to significant risks and the Corporation can give no assurance that its investments will generate any particular level of return. See "BONDHOLDERS' RISKS" in the forepart of this Official Statement and "Liquidity, Investment Policy and Investment Portfolios" below. During periods when the Corporation suffers investment losses, its current and future business plans and financial results could be materially impacted. Unrealized Losses on Interest Rate Swaps. In 2007, the Corporation entered into interest rate swap agreements with Citibank N.A. with an effective date of May 31, 2007. The swaps were initially designated and qualified as cash flow hedges. In May 2008, the swap agreements were amended to cancel a swap surety provided by a bond insurer (Ambac) and integrate the swaps with the Series 2008 D -F Bonds. Upon re- designation of the swaps to the 2008 Series D -F, the Corporation discontinued the use of the cash flow hedge method of accounting. The Corporation now recognizes any change in the fair value of the swap in the excess (deficiency) of revenue over expenses. As of September 30, 2010, the Corporation's mark -to- market liability on the swaps totaled approximately $44 million as compared to $29 million as of the end of the prior year. This increase in liability is due to the decline in interest rates since the fall of 2008. In addition, the Corporation is required to post collateral under these swap agreements to secure its obligations to the swap counterparty when exposure exceeds certain stated thresholds. As of September 30, 2010, the Corporation had posted approximately $29 million in cash collateral, which is reported on the Obligated Group's Balance Sheet as assets limited as to use. See also "Certain Indebtedness and Liabilities" below. For further discussion of the Corporation's swaps, see the section of the Official Statement entitled "BONDHOLDERS' RISKS - Interest Rate Swaps and Other Hedge Risk." Other Nonoperating Losses and Expenses. For the Fiscal Year ended September 30, 2010, other nonoperating losses totaled approximately $28 million compared to a loss of $17 million for the prior year. The majority of the nonopemting losses in 2009 and 2010 are attributable to pre - opening costs in connection with the planning and development of Hoag Hospital Irvine, including lease rental expenses. See also "HOAG HEALTH FACILITIES — Irvine Campus." Balance Sheet and Cash Position. As of September 30, 2010, the Obligated Group had unrestricted cash and investments of approximately $990 million. The Obligated Group's balance sheet and cash position remained strong with 532 days cash on hand at September 30, 2010, and unrestricted cash -to- puttable debt of 213 % and cash -to- total debt of 186 %. See the table in "Liquidity, Investment Policy and Investment Portfolios" section A -35 below. Declines in days cash on hand have been primarily driven by an increase in total operating expenses as positive cash flow from operations coupled with contributions from the Foundation have been sufficient to fund operations and continuing capital expenditures, as well as swap collateral requirements. See also "Liquidity, Investment Policy and Investment Portfolios" below. Capital expenditures were approximately $144 million for the Fiscal Year ended September 30, 2010, consisting principally of expansion projects, including Hoag Hospital Irvine, information technology and information exchange investments, and ongoing infrastructure projects. Approximately $18 million was incurred for tenant improvements on behalf of HOI and is being financed through the sublease agreement between the Corporation and HOI. A significant amount was incurred by the Obligated Group on ongoing infrastructure and expansion projects, including Hoag Hospital Irvine. Liquidity, Investment Policy and Investment Portfolios As noted above, at September 30, 2010, the Obligated Group had approximately $990 million of unrestricted cash, cash equivalents and investments, including Board - designated funds and other investments. The following table sets forth the Obligated Group's unrestricted cash and investments for fiscal periods ended September 30, 2008, 2009 and 2010. Cash and cash equivalents consist mainly of bank deposits and short-term investments in money market funds. The Board- designated portfolio is segregated into two pools: Short-Term Portfolio and Long -Term Portfolio. In determining the asset allocation targets for each pool, the Corporation considers the operating characteristics, including time horizon, liquidity requirement, return expectations and risk tolerance. The Corporation updates its investment policy on an annual basis or as needed based on the Corporation's revised long -range financial plans and liquidity requirements. Unrestricted Cash and Investments (Dollars in Thousands) September 30, 2008 September 30, 2009 September 30, 2010 Cash & Cash Equivalents $74,380 7.8% 138,353 14.0% 69,272 7.0% Other Short-Term Investmentsirl 4,810 0.5% 5,824 0.6% 12,102 1.2% Board - Designated Short -Term Portfolio ['l Comprised of investments in debt and equity mutual funds. [21 Total Cash & Investments does not include trustee -held bond funds, self - insurance assets and swap collateral posted pursuant to the terms of the swap agreements. See "Certain Indebtedness and Liabilities." The total amount of cash collateral posted with the swap counterparty was approximately $28.8 million as of September 30, 2010. 1A Total unrestricted cash & investments divided by total cash expenses (Operating Expenses less Depreciation and Amortization) multiplied by 365. A -36 219,159 22.9% 183,376 18.6% 259,688 26.3% Board - Designated Long -Term Portfolio Fixed Income 175,756 307,311 219,085 Equities 289,814 224,911 268,918 Alternative Investments 192,998 126,202 160,528 Total Long -Term Portfolio 658,568 68.8% 658,424 66.8% 648,534 65.5% Total Cash & Investmentslzl $956.917 $985 977 989 596 Days Cash on Hand 131 597 568 532 ['l Comprised of investments in debt and equity mutual funds. [21 Total Cash & Investments does not include trustee -held bond funds, self - insurance assets and swap collateral posted pursuant to the terms of the swap agreements. See "Certain Indebtedness and Liabilities." The total amount of cash collateral posted with the swap counterparty was approximately $28.8 million as of September 30, 2010. 1A Total unrestricted cash & investments divided by total cash expenses (Operating Expenses less Depreciation and Amortization) multiplied by 365. A -36 The Corporation's Board - designated investments are invested pursuant to an investment policy, which has been approved by the Corporation's Board of Directors, designed to provide a framework within which to manage the assets. The Board has delegated the implementation of this policy to an Investment Management Committee ( "IMC' , which consists of members of the Board and other appointed members. The IMC is authorized to take any and all actions consistent with the investment policy and may further delegate authority to act within the guidance provided by this policy to the Corporation's management. The IMC may also designate an investment advisor. The overall investment objective, as delineated in the Corporation's investment policy, is to invest the Board - designated investments in a manner that ensures sufficient resources will be available to meet the Corporation's immediate and long -term cash flow requirements, while preserving principal and maximizing returns, given appropriate risk constraints. The policy seeks to identify acceptable risk levels associated with reaching long -term rate of return objectives. In addition, the Corporation currently complies with the liquidity requirements of certain of the bond rating agencies related to the portion of the 2008 and 2009 Bonds which are not supported by a liquidity facility, whereby it must maintain, in the aggregate, sufficient assets, primarily marketable fixed income securities, certain publicly traded equity securities and other liquidity support vehicles, to be used to repurchase such bonds in the event of a failed remarketing. The total investments in securities with same or next -day liquidity was approximately $466 million as of September 30, 2010, including cash equivalents held as operating reserves, fixed income securities of varying maturities held in the Corporation's Short- Term Portfolio, and certain fixed income holdings part of the Corporation's Long -Term Portfolio. While the Corporation expects to maintain sufficient liquidity to meet its obligations, the incurrence of any significant tender activity and subsequent failed remarketing related to the 2008 Bonds, whether directly (with respect to the 2008C Bonds) or pursuant to the Reimbursement Agreement (with respect to the Series 2008D, 2008E and 2008F Bonds), or the 2009 Bonds subject to remarketing in 2011 and 2013, could materially adversely affect the financial position of the Obligated Group. See `BONDHOLDERS' RISKS — Other Risk Factors — Risks Related to Outstanding Variable Rate Obligations." The Corporation's investments are currently managed by a number of professional investment managers under the supervision of the IMC of the Corporation and the internal and external investment staff. The Corporation may hire new managers, expand the authority of existing managers or terminate managers subject to an approval process established by the IMC. Portfolio investments undergo significant turnover and are actively managed by the investment managers retained by the Corporation. Individual investment guidelines are established for separately managed accounts. The Corporation may also invest in commingled funds maintained by third parties. Investment guidelines for commingled funds should be consistent with the intent of the Corporation's investment policy, but need not comply with the policy in its entirety. Short -Term Portfolio. The Short-Term Portfolio is dedicated to meeting the funding requirements of the Corporation's strategic plan in addition to other short-term liquidity needs, such as potential purchase of tendered 2008 Bonds and 2009 Bonds in the event of a failed remarketing. The Short-Term Portfolio is to be invested in high quality fixed income securities of varying maturities, including longer term assets. At September 30, 2010, the Short-Term Portfolio had an aggregate market value of approximately $260 million and represented approximately 26% of the Obligated Group's cash and investments. Long -Term Portfolio. The Long -Term Portfolio functions as a quasi - endowment. While not intended to experience a significant withdrawal of reserves, this pool serves as a source of cash to cover economic risks and strategic opportunities and, to the extent necessary, self - liquidity associated with funding any required repurchase or reimbursement obligation with respect to unremarketed tenders of 2008 Bonds and 2009 Bonds, as required from time to time. In addition, the Corporation evaluates the appropriate level of investments to be maintained in the Short-Term Portfolio annually or when significant cash flows occur and covers any shortage, if any, by liquidating investments in the Long -Term Portfolio and transferring the cash to the Short-Term Portfolio. In October 2009, the Corporation transferred $70 million from the Short-Tenn Portfolio to the Long -Term Portfolio. The investment objectives for the Long- A -37 Term Portfolio are structured as long -term goals designed to maximize returns without exposure to undue risk. With the understanding that fluctuating rates of return are characteristic of the securities markets, the investment managers' greatest concern is expected to be long -term appreciation of the assets and consistency of total portfolio returns. At September 30, 2010, the Long -Term Portfolio had an aggregate market value of approximately $648 million and represented approximately 65% of the Obligated Group's total unrestricted cash and investments. The IMC has established long -term asset allocation targets within certain ranges approved by the Corporation's Board of Directors. The current allocation targets for the Long -Term Portfolio are as follows: 28% fixed income, 37% public equity, 7% private equity, 7% real assets, and 21% hedge funds. Actual allocations differ significantly from target allocations due to market fluctuations as well as the nature of private investments structured as "drawdown" funds which require capital contributions over a multi-year investment period. From time to time, the Corporation may revise the long -term targets for each asset class. In addition, actual allocations may differ from target allocations in the short-term or during periods of significant market fluctuations and there can be no assurance that the Corporation will rebalance its investment portfolios. The investment policies are subject to revision from time to time by the Corporation's Board of Directors. There can be no assurance that the Corporation will achieve its investment objectives or that it will receive any return on its investments. Investment performance may be volatile and the Corporation may lose a significant portion of its investment portfolio. Adverse economic and market conditions or other events could result in substantial or total loss to the Corporation in respect of some or all of its investments. Moreover, the Corporation may make certain investment decisions which involve realization of gains or losses based on compliance with its financial covenants under the Master Trust Indenture, the Reimbursement Agreement described below or other financial arrangements, under which realized gains or losses affect compliance with required debt service coverage ratios. Certain Indebtedness, Liabilities & Derivative Transactions In June 2009, the City issued, for the benefit of the Corporation, $211,025,000 aggregate principal amount of Revenue Bonds (Hoag Memorial Hospital Presbyterian) Series 2009 A -E Bonds (the "2009 Bonds "). The Series 2009A Bonds, in the amount of approximately $67 million, were issued as fixed rate bonds with coupon rates of 3% to 5 %. The Series 2009B and 2009C Bonds were issued at total par of approximately $73 million and initially bear interest at a long -term interest rate of 4 %. These bonds are subject to mandatory tender for purchase and remarketing in February 2011 and are being refinanced with the 2011 Bonds. See also "PLAN OF FINANCE" in this Official Statement. The Series 2009 D and E Bonds were issued at total par of approximately $71 million and initially bear interest at a long -term interest rate of 5 %. These bonds are not subject to optional tender for purchase during the initial long -term interest rate period but are subject to mandatory tender for purchase and remarketing in February 2013. At the end of the initial long -term interest rate period in February 2013, the Corporation may convert these bonds to a different interest rate mode or a new term in accordance with the indenture for the 2009 Bonds. In May 2008, the City issued, for the benefit of the Corporation, $452,080,000 aggregate principal amount of Refunding Revenue Bonds (Hoag Memorial Hospital Presbyterian) Series. 2008 A -F (the "2008 Bonds "). The proceeds of the 2008 Bonds were used to refund debt related to a portion of the Corporation's prior auction rate securities. The Series 2008A and 2008B Bonds, in the aggregate principal amount of approximately $132 million, were issued as Serial Bond Interest Rate Bonds and were refunded concurrently with the issuance of the 2009 Bonds in June 2009. The Series 2008C Bonds, in the amount of approximately $70 million, were issued as variable rate bonds initially bearing interest at a Weekly Interest Rate. Bondholders have the right to tender the bonds on a daily basis with seven days notice. The Series 2008C Bonds are supported by self - liquidity, whereby the Corporation maintains, in the aggregate, sufficient assets, primarily marketable fixed income securities, certain publicly traded equity securities and other liquidity support vehicles, to be used to repurchase the A -38 bonds in the event that tender bonds are not successfully remarketed. See "Liquidity, Investment Policy and Investment Portfolios" above. The Series 2008D, 2008E and 2008F Bonds, in the aggregate principal amount of $250 million, were issued as variable rate bonds initially bearing interest at a Weekly Interest Rate. While the Series 2008D, 2008E and 2008F Bonds are in the Weekly Interest Rate Period, the purchase price of these bonds as well as principal and interest payments on these bonds are supported by an irrevocable, direct -pay letter of credit (the "2008 E/F Letter of Credit ") issued by Bank of America, N.A. ( "BoIA "), pursuant to and subject to the terms of a Letter of Credit Agreement dated May 22, 2008 (the "BofA Reimbursement Agreement "), among the Corporation, the Bank and certain other lenders, provided that effective February 8, 2011, the Series 2008D Bonds are supported by an irrevocable, direct -pay letter of credit (the "2008D Letter of Credit ") issued by JP Morgan Chase Bank, N.A. ( "JP Morgan Chase ") pursuant to and subject to the terms of a Reimbursement Agreement dated as of February 1, 2011 (the "JP Morgan Chase Reimbursement Agreement ", and together with the BofA Reimbursement Agreement, the "Reimbursement Agreements "). The 2008 E/F Letter of Credit will expire on May 22, 2013, and the JP Morgan Chase Letter of Credit will expire on February 8, 2014, unless extended or terminated prior to expiration pursuant to their respective provisions, and each may, under certain circumstances, be replaced by a substitute letter of credit. In such events, the related bonds are subject to mandatory tender for purchase. The Reimbursement Agreements are each secured by an Obligation issued under the Master Indenture. The Reimbursement Agreements set forth various representations, warranties and covenants of the Corporation, some of which may be different from those applicable under the Master Indenture, and also establishes certain events of defaults. In 2007, the Corporation entered into interest rate swap agreements (the "Interest Rate Swaps ") with respect to a portion of the 2007 Bonds, for the purpose of managing the Corporation's exposure to fluctuations . in interest rates. Citibank N.A., New York is the counterparty to the Interest Rate Swap Agreements. As a result of the refunding of the 2007 Bonds in May 2008, the Interest Rate Swap Agreements were amended to correspond to the Series 2008D, 2008E and 2008F Bonds. The Interest Rate Swaps, which are intended to effectively convert a portion of the Corporation's floating -rate debt to a fixed rate, hedge a total initial notional amount of $250 million at a 3.229% fixed interest rate against 55.7% of the USD- LIBOR -BBA rate plus twenty -three basis points (0.23 %). Settlements are made on a monthly basis with the counterparty, Citibank, N.A., over the term of the agreements, each of which expires in December 2040, unless earlier terminated by the Corporation. The floating rate payments received by the Corporation, which are intended to offset interest rate payments on a portion of the Corporation's variable rate bonds, have decreased substantially as a result of a significant fall in 1 -month USD -LIBOR -BBA rates. The Corporation is required to post collateral under the Interest Rate Swap Agreements. See "SELECTED UTILIZATION AND FINANCUL INFORMATION — Management's Discussion and Analysis of Financial Information" above, See, also, the section of the Official Statement entitled `BONDHOLDERS' RISKS - Interest Rate Swaps and Other Hedge Risk." Capital Expenditures The Corporation maintains a comprehensive capital plan (the "Capital Plan ") to plan for ongoing development of the Newport Beach and Irvine campuses and other sites, as well as capital investment in key programs and strategic initiatives. The Capital Plan and other planning activities of the Corporation actively address, among other matters, improvements to the hospital campuses in Newport Beach and Irvine, the development of ambulatory sites, investments in information technology and seismic compliance. Capital expenditures of the Obligated Group amounted to $144.1 million for the fiscal year ended September 30, 2010. The Corporation's Capital Plan for fiscal years 2011 through 2015 includes $339 million of approved capital projects, including expansion of the Hoag Heart and Vascular Institute, investments in the Corporation's ambulatory growth strategy, information technology investments, as well as ongoing infrastructure and equipment updates at Hoag Hospital Newport Beach and Hoag Hospital Irvine. Included in the Capital Plan are two capital investments related to the implementation of the Corporation's Continuum of Care strategy through expansion of ambulatory care services in adjoining communities. The A -39 total cost of these investments is estimated at approximately $73 million for fiscal years 2011 through 2015. The Corporation has been actively achieving compliance with California seismic upgrade regulations. See the section of the Official Statement entitled `BONDHOLDERS' RISKS — Other Risk Factors — Facility Damage, Earthquakes and other Disasters." On the Newport campus, the Sue and Bill Gross Women's Pavilion, being a base isolated building, is fully compliant with seismic standards of inpatient care and meets the requirements of state law SB 1953. Additionally, on the Hoag Hospital Newport Beach campus, three other buildings were reclassified in 2010 by OSHPD as SPC -2 buildings under the HAZUS system, allowing their use as acute care facilities until 2030. Currently, two remaining OSHPD SPC -1 rated buildings on the Newport Beach campus are in final review at OSHPD with approval to be rated as SPC -2 buildings anticipated in 2011. This reclassification will allow their continued use in compliance with current state law until the year 2030. The Hoag Hospital Irvine/Hoag Orthopedic Institute building has OSHPD approval for use as an acute care facility to 2030 and beyond. The Corporation anticipates that the new money proceeds of the Series 2011 Bonds will be used for reimbursement of selected capital expenditures associated with existing projects, including equipment replacement, infrastructure improvements to the Newport Beach Campus and expansion of the Hoag Heart and Vascular Institute. The Corporation expects to fund the balance of the existing Capital Plan from cash from operations, investment income and reserves, future charitable contributions and (subject to market and other conditions) future borrowing. The Corporation will continue to monitor capital requirements in connection with its ongoing reevaluation of the Capital Plan. Before any individual project is undertaken or significant capital costs are incurred, the project will be evaluated by management for financial feasibility and will be submitted for approval to the Board. The Corporation cannot make any representation that such projects will occur, or, if they do occur, as to the cost or timing of such projects. Such projects, including construction projects currently in progress, are subject to significant risks. See the section of the Official Statement entitled "BONDHOLDERS' RISKS — Other Risk Factors — Contributions" and "— Construction Risk." Fundraising Charitable fundraising has historically provided major support to the Corporation. Through the Foundation's Renaissance Hoag campaign, the Corporation started a major fundraising effort in Fiscal Year 2007 associated with the Corporation's growth plan, including a number of campaign initiatives to support the Corporation's capital projects and program development, as well as endowment growth. Key initiatives are focused on raising funds for the Heart and Vascular, Cancer, Neurosciences, Orthopedics and Women's Services, in addition to major initiatives focused on diabetes and nursing. The Renaissance Hoag campaign plan is consistent with and supports the Corporation's Capital Plan. The Corporation expects to receive as much as $315 million in charitable contributions over 10 years, a portion of which may be applied to the cost of capital projects. Through September 30, 2010, the Foundation has raised approximately $135 million in pledges and receipts. Although the Foundation has a history of successful fundraising, there can be no assurance that such efforts will raise the estimated funds. The pace of major gift decisions slowed down during the most recent recession, but donor pledges have picked up during the latter half of Fiscal Year 2010. See the section of the Official Statement entitled `BONDHOLDERS' RISKS — Other Risk Factors — Contributions." California Hospital Provider Fee Subsequent to the Corporation's 2010 Fiscal Year end, the Centers for Medicare & Medicaid Services ( "CMS ") approved the final elements of a California hospital provider fee program which imposes a one -time fee on California general acute care hospitals, payable in installments during the last three months of 2010, and which provides for supplemental Medi -cal payments made to providers. As a result, A -40 the Corporation has begun making payments, the net effect of which prior to any private grant proceeds, is expected to total approximately $12 million, net of supplemental payments under the California hospital provider fee program, in Fiscal Year 2011. While a private granting mechanism may be effective to alleviate some of the negative financial impact, the Corporation gives no assurances such amounts will offset the payments under the California hospital fee program in whole or at all. Also, the Corporation cannot predict whether the State legislature will take action to extend the fee beyond December 31, 2010. See the section of the Official Statement entitled "BONDHOLDERS' RISKS Patient Service Revenues California Hospital Provider Fee." OTHER INFORMATION Licensure, Certification & Accreditation The Corporation is licensed to operate both Hoag Hospital Newport Beach and Hoag Hospital Irvine by the State of California Department of Public Health. Both general acute care facilities operate under the same license and are certified to participate in the Medicare program. The Corporation has received full accreditation for both hospitals by Det Norske Veritas Healthcare, Inc. ( "DNV Healthcare, Inc. "). The most recent National Integrated Accreditation for Healthcare Organizations (NIAHOs"') Hospital Accreditation Program survey for Hoag Hospital Newport Beach was completed on January 21, 2010. Upon opening the Irvine campus, a DNV Healthcare Inc. extension survey was successfully completed for Hoag Hospital Irvine on October 1, 2010. HOI is separately licensed to operate a general acute care facility and is certified to participate in the Medicare program. See also "HOAG HEALTH FACILITIES & SERVICES — Irvine Campus - Hoag Orthopedic Institute." Awards and Recognitions HealthGrades recognized the Corporation for clinical excellence. The Corporation was the recipient of the following awards: • 2009 Distinguished Hospital Award for Clinical Excellence • 2009 Patient Safety Excellence Award • 2009 Orthopedic Care Excellence Award • 2009 Stroke Care Excellence Award • 2009 Vascular Care Excellence Award o A study by HealthGrades, an independent health care research firm, placed the Corporation within the top 10 percent of hospitals in the nation for a number of specialties: • Cardiac Surgery • Coronary Intervention • General Surgery • Joint Replacement • Orthopedic Surgery • Stroke Care • Vascular Care o The Premier Healthcare Alliance recognized the Corporation as a Winner of the 2009 Award for Quality, a national leader for its commitment to high - quality patient care and operational efficiency. o In 2010, the Corporation was re- designated as a Magnet Hospital by the American Nurses Credentialing Center (ANCC). The Magnet designation is a key component of the Corporation's nursing recruitment and retention strategy. The Magnet Recognition Program was developed by ANCC to recognize health care organizations that provide nursing excellence and is based on quality indicators and standards of nursing practice as defined in the American Nurses Association's Scope A -41 and Standards for Nurse Administrators (2004). The Corporation's certification as a Magnet Hospital is subject to a renewal process every 4 years. Hoag has earned accreditation from the College of American Pathologists (CAP) and the American Association of Blood Banks (AABB). o The Department of Health and Human Services recognized Hoag with the 2009 HHS Bronze Medal of Honor for its success in increasing the number of organs available for transplantation. The Corporation is among the top five percent of hospitals in the nation based on a 2009 study by HealthGrades, and is a recipient of the 2008 Distinguished Hospital Award for Clinical Excellence. o HealthGrades presented the Corporation with the 2009 Outstanding Patient Experience Award, a study that found a high patient satisfaction score based on the Corporation's patients' experiences in the hospital. National Research Corporation has endorsed the Corporation as Orange County's most preferred hospital for the past 15 consecutive years. For the past 15 years, residents have expressed their consumer preference for the Corporation as Orange County's "Best Hospital" in a survey by the Orange County Register, a local newspaper. The Corporation scored above the national comparisons and ranked second out of 232 California hospitals in the Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) Survey Patient Satisfaction Report. The Corporation has received additional awards and recognitions for a wide range of services in specialty areas, such as cancer, heart and vascular, neurosciences and women's health. See "HOAG HEALTH FACILITIES & SERVICES — Newport Beach Campus" above. Notwithstanding the significant recognition the Corporation has received in numerous areas, the Corporation's services remain subject to significant financial and professional risks. See the section of the Official Statement entitled `BONDHOLDERS RISKS." Community Outreach, Education and Volunteer Services Through its Community Medicine program, the Corporation sustains the steadfast community service values that have been so vital to its growth and success. As an integral partner with more than 70 local community organizations, the Corporation reaches out to its neighbors and helps ensure access to health care for those who are truly in need. These collaborations are targeted at improving the community's overall health primarily through disease prevention and health promotion. Striving to continually collaborate with the surrounding communities and their programs, Community Medicine keeps a pulse on the health related activities working to enhance services for the disadvantaged and vulnerable. The Corporation's Community Medicine program involves partnerships with organizations from eight major focus areas: • Access to Health Care • Children/Youth • Community Empowerment • Family Issues • Nutritional Assistance • Senior Issues • Specific Diseases • Women's Services A -42 The Corporation also provides several outreach programs within its Community Medicine division: Health Ministries; Community Case Management; Counseling and Psychotherapy Services; Project Wipeout a beach and sun safety program; and the Freedom from Smoking Program. These programs are coordinated and administered by the Corporation's clinical and support staff. The Corporation provides charitable community benefit programs in compliance with California law governing community healthcare needs assessments and nonprofit hospital community benefit plans. The Corporation's Community Benefit Plan consists of programs that are conducted primarily as collaborative partnerships within Orange County without expectation of business augmentation or financial return to the Corporation. The plan is designed to improve access to health care for vulnerable populations and the overall physical and social health status of local communities. Providing in -kind services and direct monetary donations to support nonprofit organizations, and focusing on disproportionate unmet health needs, the Corporation's Community Benefit Plan addresses primary prevention, chronic disease management and health promotion through: • patient & family support groups • financially uncompensated clinical research & care • health education classes • informational programs & materials • support for access to health care • screening & immunization programs • general & emergency medical services for vulnerable populations • resource brokering services • culturally and linguistically appropriate counseling services for at -risk families and youth Nursing Education • community partnerships, such as those with the Share Our Selves (SOS) Free Medical and Dental Clinic and Alzheimer's Family Services Center • culturally and linguistically appropriate community case management for vulnerable populations • support of public health partnership programs targeting specific entities (i.e., domestic violence, child abuse, teen pregnancy, diabetes, obesity, and youth gangs) • health ministries parish nurse program • senior transportation programs Generally, the markets in which the Corporation operates are experiencing nursing shortages which are expected to continue for the foreseeable future. To address this shortage, the Corporation has implemented a number of initiatives to fund nursing education programs and expand the supply of nurses. In the Fiscal Year ended September 30, 2010, the Corporation awarded more than $160,000 in scholarships to its employees. The scholarship funds help nursing students buy books and pay for tuition and fees. In addition, to support local colleges and universities, the Corporation directly funds professorships for nursing instructors. A one -year professorship, valued at $100,000, enables 12 nursing students to enroll from a waiting list. Presently, the Corporation partners with Golden West College, California State University Long Beach, Saddleback College, California State University Fullerton, Santa Ana College and University of California, Irvine. In the Fiscal Year ending September 30, 2011, the Corporation expects to fund approximately $1,000,000 in nursing professorships. In addition, the Corporation celebrated the opening of The Marion Knott Nursing Education Center in January 2007, an on- campus Nursing Education Center featuring classroom space, and the latest technology and equipment to educate current staff, new hires and nursing students performing clinical rotations. To maximize the learning experience, the education center duplicates the hospital's patient environment. Volunteer Services & Support The Corporation receives support through the Foundation, which is a separate nonprofit tax - exempt corporation. Under the direction of the Foundation, there are two support groups with a total membership of over 4,000 men and women. In addition to the Foundation, there is also an independent A -43 800 - member Auxiliary that supports the Corporation with volunteers and contributions, and an additional 800 volunteers supporting the Corporation on the campuses in Newport Beach and Irvine. Volunteers provide a variety of services, such as greeting and assisting of patients and visitors. Employees As of September 30, 2010, the Corporation and its wholly -owned subsidiaries had 5,053 employees, consisting of approximately 3,700 full -time and 1,300 part-time employees. Of those, approximately 1,600 are registered nurses. The employee count above includes all hospital related functions as well as support functions and workforce provided to HOI through an employee lease agreement. Support functions include the Child Care Center, seven outreach medical office buildings known as the Hoag Health Centers, and management of the Foundation. Employee Retirement Plans The Corporation has a 401(k) plan in which substantially all full -time employees who meet certain criteria are eligible to participate. The Corporation does not have a defined benefit plan. LEGAL & REGULATORY MATTERS The Corporation is involved in various liability disputes, governmental and regulatory inspections, inquiries, investigations, proceedings and litigation matters that arise from time to time in the ordinary course of business. The Corporation is self - insured with respect to professional liability and comprehensive general liability risks, subject to certain limitations. Professional and comprehensive general healthcare liability risks in excess of $2 million per occurrence are reinsured with major independent insurance companies up to an aggregate liability of $30 million. The Corporation has been named in a wage and hour class- action lawsuit filed in August 2009. The Corporation is unable to predict the outcome of this matter, which it intends to vigorously defend, but the Corporation is aware of judgments and settlements in similar wage and hour class action lawsuits brought against other healthcare systems in which the amounts were significant. The lawsuit is still in the discovery phase. The class certification hearing is scheduled to take place in mid -2011. See `BONDHOLDERS' RISKS Business Relationships and Other Business Matters Professional Liability Claims and General Liability Insurance" and "LITIGATION Hoag Hospital and NHC" in the forepart of this Official Statement for additional information regarding litigation and claims risks. POTENTIAL AFFILIATIONS AND TRANSACTIONS Management expects competitive pressures from competing health care delivery systems to intensify in the future and elements of national health care reform to increase the importance of strategic alliances along the continuum of care within relevant service areas beyond an inpatient service model. For example, competition from comprehensive health care systems as well as specialty providers of care is expected to increase and may negatively affect programs that are economically important to the Corporation. See the section of this Official Statement entitled `BONDHOLDERS' RISKS — Significant Areas Summarized — Proliferation of Competition" and " — Business Relationships and Other Business Matters — Competition Among Healthcare Providers" and " — Integrated Physician Groups." Pursuant to the Corporation's strategic plan, the Corporation is committed to actively pursuing opportunities with health care organizations, as well as physicians and physician groups, including arrangements which are responsive to these competitive pressures. See "GENERAL — Strategic Direction." HOI and the opening of the Specialty Hospital on the Irvine campus represent one significant arrangement which is responsive to these issues. See "HOAG HEALTH FACILITIES & SERVICES — Irvine Campus — Hoag Orthopedic Institute." The Corporation may negotiate for and enter into other affiliations, joint ventures or contractual arrangements in the future in furtherance of its strategic plans and community mission. Further acquisitions, affiliations or joint ventures may involve substantial capital A -44 expenditures or other financial commitments, all or a portion of which may be financed through debt incurred by the Corporation. See, for example, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION — Capital Expenditures." Such affiliations or joint ventures may involve inpatient or outpatient specialty services performed at or outside the Corporation's primary hospital campuses and may result in a significant transfer of patient revenues to the joint venture or affiliated entity. Taken individually or in the aggregate, such transactions may be material to the Corporation's finances. Overall, the Corporation expects that such arrangements would be beneficial to the Corporation and have a positive impact on the operating results of the Corporation, although short-tern impact may be negative. Such transactions may involve significant risks. Additionally, management expects industry pressures to intensify in the future both as the result of federal health care reform as well as market forces aimed at controlling costs. Pursuant to the Corporation's strategic plan, the Corporation is actively pursuing strategies to expand its business model from a fee -for- services platform to one that is risk -based and value- oriented along the continuum of care, which may include primary care, urgent care, disease management and post -acute care related services. Such strategies may include further physician arrangement, acquisition or partnering of population management capabilities, as well as participating in innovative payment pilots, nationally and locally. See "GENERAL — Strategic Direction." While the Corporation considers such opportunities as they are presented or in response to strategic initiatives, no definitive agreements with respect to any pending affiliations or joint ventures have been reached at this time. The terms and conditions of any future affiliations are not established and will ultimately be subject to approval of the Board of Directors and other conditions, including compliance with applicable legal and regulatory constraints, as well as the Corporation's financial covenant requirements. In any case, implementation of specific strategic affiliations and joint ventures is subject to significant risks and conditions precedent. The Corporation cannot predict whether any such material arrangements will be entered into or the ultimate terms on which they may be developed. A -45